Buying a rental property can be a great investment and perhaps even a source of income. A home’s value typically appreciates over time, so in addition to collecting monthly rent payments, you stand to make a profit should you ever decide to sell the property. However, buying a rental property is a major financial (and time!) commitment, and there are several factors you should take into account before taking the plunge.
Qualifying for a Rental Property Loan
Securing a loan to purchase a rental property varies somewhat from the standard home loan process. For one, there is a higher minimum downpayment for investment properties—15% for a single-family home and 25% for a 2-to-4 unit property.
It’s also important to ensure the money you have to put as a down payment is your own. Investment properties cannot be secured with money that has been gifted to you. The lender wants you to have your own skin in the game and that you’re well qualified. They’ll want to know you can handle both payments if the house sits unrented for a period of time, or if the tenant can’t pay their rent. If that feels like a financial stretch, it might be wise to wait a while longer and build more savings.
Unconventional Avenues to Your First Rental Property
If securing a solid down payment is an issue, there are a few outside-the-box approaches you might consider.
Partnering on your first rental property
Purchasing your first investment property with a partner can be an excellent way to not only afford your first rental but to gain experience in rental property management, as well. This allows you to split the cost and the risk, keep the property for a few years, learn how to be a landlord or work with a property management company. You can sell the property, split the revenue, which, if profitable enough, would allow you each to go out and purchase your own individual properties.
Make your first home your first rental property
Many first-time homebuyers struggle to find their “dream home.” Instead of holding out for the perfect first home, however, it may be worthwhile to look instead for a solid starter home you can one day transition to a rental property.
This way, when you leave to go buy another house, you’re able to use the majority of the income from your now-rental to offset your new home’s mortgage, allowing you to more easily qualify for your new home loan.
Just make sure you plan to stay in that primary residence/future rental for at least a year since most loan documents will ask you to agree to this.
One decision all rental property owners must consider is whether they would like to manage their properties themselves or contract with a rental management company. If you have the time to dedicate, doing it yourself can save you money. However, many view the 8-to-12% that property management companies typically charge to be well worth having someone else manage all the paperwork, liability issues, and tenant requests.
When investing in a rental property, having insurance is key. Many ask whether it’s wise to establish an LLC for their rental, and while getting expert legal advice is always advised, Nick’s experience has shown that having insurance is more important than an LLC. With an LLC, you’re not necessarily protected and there’s a risk you could be sued, but increasing your umbrella insurance policy could protect you from the worst happening.
Dedicated Checking Account
It’s also wise to establish a separate checking account to cover everything for your rental property. This will prove handy when it’s time to do your taxes, as you can easily track all outgoing expenses and incoming rent in one spot.
How to Learn More About Investing in a Rental Property
If you’re intrigued by the idea of investing in a rental property or even transferring your current home into a rental, Directors Mortgage is here to help! Read more about the pros and cons in our blog article, Rental Property Real Estate Investment 101, or listen to the episode of Direct Talks | More Than a Mortgage Buying a Rental Property w/ Nick Carter.
When you’re ready to take the next step, give our team a call.