Thinking of buying an investment property? Buying rental property requires knowledge of leasing, mortgages, tenant-landlord relationships and property management. Buying real estate can be lucrative, but like any investment, it comes with benefits and challenges.
Key points to remember
- Rental property investors typically require a 15-25% down payment for a rental property loan.
- A landlord needs a wide range of skills, from understanding basic tenant law to fixing a leaky faucet.
- A passive investor is passive and may choose to pay for the services of a property manager or invest in real estate investment trusts (REITs).
- Full-time investors spend a lot of time choosing homes and fixing them up to sell or rent.
- Investment rental properties can include vacation homes, multi-family homes, or single-family homes.
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So you want to own?
Buying an investment property and acting as an owner can be a great way to earn income, but requires a commitment of time and money. After choose the right propertyprepare the device and find reliable tenantsongoing maintenance is required.
Maintenance and upkeep costs can reduce your rental income. There is always a risk of an emergency, such as damage to the roof. Investors should plan to set aside 1% of their property value for repairs.
Rental property owners can manage the property themselves or rent a building manager, which generally charges between 8% and 12% of the rents collected. Although expensive, a property manager can provide a wide range of services, including organizing maintenance and repairs, screening new tenants, and managing overdue rent payments.
In addition, rental property owners need to be aware of the landlord-tenant laws in their state and locality. Tenants and landlords have rights and obligations regarding security deposits, lease requirements, eviction rules, and fair housing laws.
It is important to protect a real estate investment. In addition to home insurancerental property owners can buy owner insurancewhich covers property damage, loss of rental income and liability protection in the event of injury to a tenant or visitor as a result of property maintenance issues.
Buy a rental property
Location, location, location
A city or location with a growing population and an ongoing revitalization plan often represents a potential investment opportunity. A neighborhood with a low crime rate, easy access to public transportation, and a growing labor market can also mean a larger pool of renters.
When choose a profitable rental propertylook for a location with low property taxes, a good school district, and plenty of amenities, such as restaurants, cafes, stores, trails, and parks.
Online real estate sites like Zillow.com provide information to investors, including home rental rates and current investment property values. Airbnb.com provides investors with information on current rental rates for vacation homes or condos.
Financing your rental property
The process to get a rental property loan is the same as a principal residence mortgage, with key differences. With higher default rates on rental property loans, the added risk means that lenders typically charge higher interest rates on rental properties. An investor can choose a traditional mortgage or qualify for a FHA loan or one AV loans.
Underwriting standards may be stricter for rental property seekers. Mortgage lenders focus on credit score, down payment and debt-to-equity ratio and although the same factors apply to rental property mortgages, the borrower will likely be held to a stricter credit score. , DTI thresholds and a higher minimum down payment. :
- Credit score: A minimum score of 620, with better rates and terms offered with scores of 740 and above.
- Advance payment: 0-3% may be acceptable on a conventional mortgage for a principal residence, but borrowers for a real estate investment should generally expect a 15% to 25% drop.
- Debt ratio (DTI): DTI represents the percentage of the borrower’s monthly income spent on debt. Lenders will generally allow you to count up to 75% of your expected rental income into your DTI.
- Savings: Borrowers must have cash to cover three to six months of mortgage payments, including principal, interest, taxes and insurance.
Discrimination in mortgage lending is illegal. If you believe you have been discriminated against based on race, religion, gender, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One of these steps is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
Is it better to buy cash or finance an apartment building? It depends on the goals and savings of the investor. Paying cash for an investment property may not be an option for many investors, but can generate positive monthly cash flow immediately.
Earn money in rentals
Operating Expenses on a new rental property will be between 35% and 80% of your gross income operating result. If the monthly rent billed is $1,500, the expenses are $600 per month, that’s 40% for operating expenses. Many investors use the 50% rule. If the rent is $2,000 per month, expect to pay $1,000 in total expenses.
To reduce your costs, ask yourself if an insurer will allow you to bundle homeowner’s insurance with a home insurance policy.
Wall Street firms buying distressed properties are targeting returns of 5% to 7%. Individuals should set a return target of 10%. Estimate maintenance costs at 1% of property value annually. Other costs include home insurance, condo association fees (HOA), property taxes, and monthly expenses such as pest control, landscaping, and maintenance.
While stocks may offer a cash return of 7.5%, or bonds may yield 4.5%, a return of 6% in the first year of owning an investment property is considered healthy and healthy. this number should increase over time.
Rental property investors calculate their return on investment as ROI = (annual rental income – annual operating costs) ÷ mortgage value
Some real estate investors choose to flip homes by buying a home at a below-market rate, making repairs, and then reselling it for a high return. There may or may not be tenants in a “turnaround” and investors should consider key factors such as affordable materials and labor.
Risks and benefits of rental property
Income is passive and investors earn while working a regular job.
If real estate values increase, investment also increases.
Rental income is not subject to social security tax.
The interest you pay on a home loan may be tax deductible.
Real estate is a tangible physical asset.
Maintenance costs or property management expenses can reduce rental income.
Monthly rental income may not cover the total monthly mortgage payment.
Real estate is not a liquid asset and takes time to sell.
Entry and exit charges can be high.
If a tenant moves out, a landlord still has to pay the monthly expenses.
Should I find a real estate investment partner?
A real estate partnership helps finance the transaction in exchange for a share of the profits.
Instead, you can ask your network of family and friends, find a local real estate investment club, consider real estate crowdfundingor look for social media groups that target real estate investors.
How much down payment do you need to buy an investment property?
Lenders generally have stricter guidelines when it comes to rental properties. Although you can buy a main home with as little as 3% down, most borrowers need to set aside 15% to 20% to buy a rental property.
Should I invest in a condo?
Condos are often less expensive than single-family homes and require less maintenance. However, ongoing association dues and the possibility of costly special assessments are a risk. It is important to investigate the financial health of the homeowners association and the current condition of the entire building and individual unit.
Condos can be a good option for rental property buyers and they are often located in desirable locations.
Like many investments, rental real estate is often a long-term project. Still, rental properties can be a lucrative way to invest in real estate and provide passive, stable income for investors. Investing in rental property requires knowledge of tenant and landlord, tenancy, mortgage, and property management laws.