Are you thinking about buying an investment property? Many of the wealthiest people in the world have made real estate their investment choice. Experts agree that it is better to have a solid understanding of the subject before you invest hundreds of thousands of dollars. These are the key factors to consider when buying your first rental property.
Although it can be a great way to make a living from real estate, it is not glamorous. There are many maintenance headaches and hassles that come with selecting the right property and prepping the unit. Are you able to navigate a toolbox? Do you know how to fix drywall? You could call someone to fix it, or you could hire a property manager. However, this will reduce your profit margins. To save money, property owners who own one or two properties often repair their homes themselves.
An investment property generally requires a higher down payment than an owner-occupied property. They also have stricter approval requirements. An investment property will not work with the 3% down payment you have already paid for your home. A 20% downpayment is required, as mortgage insurance is not available for rental properties. However, you may be able to get the down payment through bank financing such as personal loans.
It is not a good idea to live in a rental home that is either declining or stabilizing. Potential investment opportunities are found in cities and locales where there is a growing population. Look for a property with low property taxes and a good school district. Also, make sure you have plenty of amenities such as shopping, restaurants, and trails. A neighborhood with low crime rates, easy accessibility to public transportation, and a growing employment market could mean more potential renters.
Which is better: to invest with cash or finance it? It depends on what your investment goals are. Positive monthly cash flow can be generated by paying cash. Consider a $100,000 property you rent. The cash buyer would see $9,500 annually in rental income and taxes. This is 9.5% of the $100,000 investment. Financing can offer a higher return. An investor might put down 20% to buy a house. The mortgage will compound at 4%. After subtracting operating expenses and interest, the annual earnings amount to $5,580. The investor's cash flow is less, but the 27.9% annual return on the $20,000 invested is significantly higher than the 9.5% earned by the cash buyer.
A rental property mortgage works in the same way as a primary residence mortgage. However, there are key differences. First, rental property loans have higher default rates because borrowers with financial difficulties tend to concentrate on their primary mortgage first. Lenders charge higher interest rates for rental properties because they are more likely to take on additional risk. There are also stricter underwriting standards for rental properties. Mortgage lenders generally focus on the borrower’s credit score, downpayment, and debt-to-income ratio. These same factors will apply to rental property mortgages. However, the lender will likely hold the borrower to a stricter credit score and DTI thresholds as well as a lower minimum down payment. The lender might also take a look at the borrower’s income and employment history, and may request proof of landlord experience.
A property manager is available to rent or manage rental property. This can be difficult as property managers charge anywhere from 8% to 12% of the rent collected. However, it is worth hiring a professional property manager. You will have less work and headaches if you use their industry knowledge. A property manager will generally:
These questions will help you decide if hiring property managers is financially prudent.
