Buying real estate for rental income is one place to put your money that has historically been considered a good, income producing, and long-term investment. Once you start to investigate opportunities and options you will find that it is an entirely different market from that of homeownership.
Buying Real Estate For Rental Makes Bank Managers Nervous
You will have to approach your bank as a business and so you will likely get a better response from the sort of banks that work with small business. Stay away from the big retail banks; you will be able to build a more product relationship with a local banker.
Lenders do not like to give mortgages based on rental income without at least two years of history. So you are not going to be able to buy a property based on the tenant’s promise to pay, lenders just do not take that type of risk.
Most mortgage insurance does not cover rental properties so it is going to be difficult to get financing unless you can make a 20% down payment. Your lender will want to see an excellent credit history and FICO Score above 740. They will need to see that you can make the down payment and still have cash reserves to pay for any contingencies or get you through periods of rental vacancies of up to six months.
The balanced approach that you will find that institutional buyers use is to leverage the cash on hand will reasonable amounts of loans. Investors with cash on hand can find that lenders will give them a 50% to 75% loan to value ratio. Real estate loans on these terms will also receive a preferential interest rate.
This effectively leverages your cash by a factor of four. The cost of borrowing will be fairly constant, subject only to any pre defined rate adjustments. Any increase in the value of the property will go to you as the investor, as will any increased rents when the market heats up.
Alternative Sources For Financing Your Rental Property
Some owners who want to dispose of their property might not need all cash. It can be a great way to make the deal happen if you can arrange seller financing. In recent year there have been developments in financing through peer-to-peer lending sites, such as lendingclub.com where investors will be more willing to consider loans to first-time landlords. This is the most recent trend in what has been traditionally called creative financing.
As the landlord you have to ensure that the rental property is in a safe condition. Managing tenancies is a topic in its own right. Risks include damage, bad tenants and vacancies while you still have to cover your costs.
You do take on some serious liability if you are a landlord; any thing that causes an injury to the tenant that they somehow could blame you for could be very, very expensive. This can be covered with insurance but you will pay increased premiums for any claim.
Buying real estate for rental is a different endeavor than buying a home to live in. There will be strict limits to the way you can use the income to qualify for a mortgage. If you have enough cash on hand or in your 401K that you can cover six months of lost income then having rental properties as investments could be a great way to round out your financial portfolio.