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Investor/Rental/Landlord

Investing in a real estate can be a reliable source of income nowadays. People invest in real estate to be rented out or used as a vacation home for travelers. But, how would you know if you are ready for investing in a real estate and becoming a landlord?

Investment property refers to any real estate that is purchased for income generation purposes. For instance, earning a return on the investment can be made through rental income or appreciation. Any type of property works for this kind of investment like a condominium, apartment, single-family home, multi-family home, and a townhouse. These can be purchased for investment either by a single investor or a pair or group of investors together.

Investing in a Real Estate: Am I Ready For It?

The mortgage rates today for investment properties are higher compared to loans for owner-occupied properties. Mortgage lenders typically charge more for properties that will not be occupied by the owner. However, if you purchase a home at a great price and finance it properly, it can lead to an immediate revenue stream.

It can be a challenge to canvass for rental property with a cheap mortgage. That being said, it is still worth investing in real estate even if the mortgage rates are high. But before investing, make sure you consider first the following factors below.

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Financial Stability - Investing in a Real Estate
FINANCIAL STABILITY
Time Management - Investing in a Real Estate
TIME FOR PROPERTY MANAGEMENT
Return on Investment - Investing in a Real Estate
RETURN ON INVESTMENT (ROI)
1.) FINANCIAL STABILITY

Mortgage lenders tend to ask at least 15% down payment for investing in a real estate. Unlike first-time home buyers, property investments require a much higher financial stability especially when planning to rent the home to tenants. Investment property owners must also have their property checked and cleared by different inspectors among the several states.

Investing in a real estate property requires enough budget to cover expenses like the down payment, inspection, closing costs, maintenance, and repairs. All the expenses do not just begin when your tenants start moving in. You also have to allocate a budget for advertising and credit check.

2.) TIME FOR PROPERTY MANAGEMENT

As mentioned earlier, you have to have enough budget for investing a property. But other than that, you must have an ample time to maintain and monitor your property as well. From putting up advertisements, interviewing and running background check on potential tenants, ensuring tenants commit to paying rent on time, up to performing maintenance.

3.) RETURN ON INVESTMENT (ROI)

Make sure that the ROI is there before deciding on buying an investment property. You may calculate the approximate ROI rates by considering the following:

  • Estimating Annual Rental Income – Look up for similar properties for rent and compute for its average monthly rent. You may find the average monthly rent for the type of property and multiple its rent price by 12 for a year’s worth of income.
  • Calculating Net Operating Income – The net operating income is equal to the annual rental estimate minus the annual operating expenses. Operating expenses include the overall amount of money that it takes to maintain your property every year; such are insurance, property taxes, maintenance, and homeowners’ association fees. Subtracting operating expenses from annual rent estimation results to net operating income. Take note that mortgage or interest is not part of the net operating expense calculation.
  • Look For Your ROI – Divide the net operating income by the total value of mortgage in order to find the total ROI.

Mortgage Rates For Investing in a Real Estate

Interest rates can be affected by a lot of factors like the down payment, type of property, and the credit score. On that note, the final interest rate will depend on the fees associated with a loan. As the fees continue to rise, the mortgage rate rises along with it.

The owner-occupied properties come with a specific set of fees that differ from fees associated with investment properties. For instance, a 20% down payment for a loan in an investment property would have a fee equivalent to 3.375 of the loan. Simple means the borrower has to pay an additional $3,375 for every $100,000 that they borrow.

Most of the time, borrowers tend to pay more in the interest rate than the closing. You might wonder how these could impact the final mortgage rate. In this situation, the 3.375% in fees can be covered by adding between 0.5% and 0.75% to the final mortgage rate. This means if you would have had 5% interest rate, expect that you will be paying an interest rate between 5.5% and 5.75% when buying an investment property.

Take note that the abovementioned case only applies to a single-family residence. You could pay an additional 1% in fees if you are opting for a duplex type of property.

Why Do Investment & Rental Properties Have Higher Interest Rates?

It can be a challenging situation for lenders whenever they are making loan decisions. This is because they know that property owners have chances of not making mortgage payments than they are not occupying the property itself. Data even showed that unlike homes, rental properties are more likely abandoned when there come financial difficulties.

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Types of Rental Investment Property Mortgages

Most mortgage programs accessed by investors when purchasing a primary resident are just the same. It’s just a matter of getting qualified for and learning that interest rates are higher.

Conventional Loan or Conforming Loan can possibly be used when purchasing an investment property. These types of loans require 15% as a minimum down payment. However, you may commit to a 20% down payment to avoid mortgage insurance.

VA Loan/FHA Loan can possibly be used as long as you are purchasing a multi-unit property and choose to live in one of the units. These government-backed loans also require a minimum down payment; 0% for VA loan while 3.5% for FHA loans.

Portfolio Loans in Texas can possibly give you an opportunity to finance multiple properties or commit to a smaller down payment. However, that could cause you higher rates. Your lender for this type of loan can freely set his own rules for investment property loans.

You may opt for Commercial Residential Loans if you are interested in buying property with five or more units. This type of loan also works for people wanting to borrow against the property’s potential income. The downside is being complicated and costly.

Possibly, you will establish a sole asset bankruptcy remote entity. This means that the owners of the properties cannot avoid paying their mortgage while keeping their rental income.

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Guidelines For Investment Property Loan

Being a landlord is going to be a challenging task. More so when you have zero experience and you have not owned a home yet.

While loan underwriters can make this tough for you, there are still instances where you may overcome this. That is if you hire someone to become your property manager. However, if you follow this Fannie Mae or Freddie Mac financing, the number of properties with a mortgage you can own will then be limited.

It’s a smart move to have several months’ worth of mortgage reverse payment to make sure you can cover your property while looking for tenants.

Higher Down Payment For Investment Property Loan is Required

Conventional loan is mostly used for financing rental properties. The table below shows the required down payment when purchasing a rental property.

LOAN TYPE1 UNIT2-4 UNITS
Fixed Rate15% down 25% down
Adjustable Rate 15% down 25% down
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Tips to Lower Mortgage Rates for Investment Properties

Larger Down Payment

One simple way to lower the mortgage rate is by making a larger down payment. The costs associated with rental properties tend to disappear when you commit to at least 20% or higher.

Borrowing against the equity of your own home in order to make a larger down payment.

Alternatively, you can purchase a house with a lower price.

You may also consider borrowing against your 401 (k) if you have a stellar investment opportunity.

Work on Credit Score

Since conventional loan rates highly depend on your credit rate, you may want to work on your credit score. It can be an issue if the property is financed with a conventional loan. Refer to the table below comparing the interest rates of buyers with different credit scores.

Credit ScoreHome PriceDown PaymentRateP & I PaymentSavings
650$250,00025%5.75%$1,095-
720$250,00025%5.13%$1,020$75/month

The buyer with higher credit score tends to be charged less and can have an easier time creating a revenue flow.

Types of Mortgage Lenders: How to Improve your Credit Score

Opt for Other Options

Recent reports have shown that a buyer can save 0.50% or higher of their interest rates if they check other options. Don’t get locked in a single quotation, check other options, and do the comparison when investing in a real estate property.

Investment Financing Methods: What are my Alternatives?

An option that could work and cost you cheaper is seller financing. A lot of sellers see this as a way to avoid any stress or problems of property management. Of course, there are also sellers who would get the property off their hands but still make a profit from buyers. In this case, just ensure you have the property checked and appraised properly.

Additionally, work with a lender who specialized in commercial residential property financing.

When the property income is enough to cover the mortgage payments and additional expenses, affordable financing options may be available.

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RENTAL PROPERTY FAQ

This is absolutely possible. Further options are available with terms of 10, 15, 20, and 25.

Investment properties have higher mortgage rates. Personal residences usually have an approximate 0.50% to 0.75% above the loan rates.

Yes, you can. The process is somewhat similar to the process of obtaining any type of mortgage. However, mortgage for an investment property requires more documentation yet simpler and more affordable when your credit score is 700 or higher, and a down payment of 20% or more.

Opting for a conventional loan for your single-unit property would require a 15% minimum down payment. Your rates will be higher and mortgage insurance also needs to be settled. If you are looking into lowering the costs, make sure to settle at least 20% down payment or more.

A 2-4 unit property requires a minimum down payment of 25%. Whereas if you are planning on staying in one of the available units, you can secure an FHA loan with a minimum down payment of 10%. You may ask the seller too to carry the finances, thus a lower down payment would be possible.

Fannie Mae & Freddie Mac loans don’t accept 10% down payment.

It may not be easy yet it’s possible. You can also try purchasing a multi-unit and then live in one of them. This way, you can secure an FHA loan and settle 3.5% down payment with gift funds coming from an eligible donor. Otherwise, you may purchase a primary residence, stay in for a year, then convert it into a rental property. You can move out and rent the home to a tenant by that time; lower interest rates shall be maintained since it was owner-occupied upon purchase.

Further options are hard money loans or lease-to-buy properties.

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