April 25, 2017
Thinking of becoming a landlord? Thought of the prospect of
buying a rental unit and letting the tenant in essence make your mortgage
payment for you? Owning real estate is one of the easiest ways to increase
wealth over time but there are some things you need to know in advance when
considering buying a financing a rental unit. Here is what you need to know.
Unless you’re financing a duplex or a 2-4 unit property and
live in one of the units, government-backed financing options of VA, FHA and
USDA can’t apply. Those mortgages are only for an owner-occupied property. That
leaves conventional mortgages underwritten to standards issued by Fannie Mae
and Freddie Mac to be used.
Down payment requirements for a rental unit are typically
20% of the sales price of the home but you can get a slightly better rate with
25% down. Interest rates on these loan programs will also be slightly higher
compared to a loan for a primary residence but overall these are the only
When you finance your first rental property you’ll soon
discover any rental income from the property can’t be used to help you qualify.
You’ll need to qualify with your income and the new mortgage along with associated
property taxes and insurance. Yet with your second rental property lenders do
in fact allow rental income to be used.
This is why it’s not uncommon to find an individual real
estate investor who owns 10 or even 20 or more rental properties because not
only can the income be used to offset the mortgage payment but also provide a
nice monthly income. The only requirement at this point is to have a two year
history of being a landlord and that ownership is evidenced by reviewing copies
of your federal income tax returns, specifically shown on Schedule E.
That’s why real estate investors carefully review the
potential acquisition to make sure the property cash flows and will not be an
added expense. If the investor determines the property will indeed provide a
positive cash flow, even considering an occasional vacancy, the property will
soon be under contract.
For more information or questions about mortgage loans, please call (855) 757-8748.