These days, many people hear in the news that it’s a good time to buy rental property and so they’ve decided that they would like to get started in the property rental business, (a.k.a. being a landlord).
But, in order to get into the rental property investment business, how do you obtain mortgage financing to purchase your first rental property? It’s true that it has become a lot harder to get financing these days; but for people with decent credit and sufficient income there is still plenty of money available to borrow. For terminology purposes, when you borrow for a rental property, it is called non-owner occupant (NOO) financing. Let’s run through some financing issues, items and suggestions that may help you.
Buy As an Owner Occupant (OO)
The best way to get into the landlord business is to buy a home that makes sense as a rental property, but you buy it as a personal residence, and live there for the required twelve months that an OO loan requires a borrower to do. As an owner occupant, you get the best financing terms and you may be able to put down as little as 3.5% with FHA financing. The loan stays in place with the original terms when you move out and make it a rental. It’s the best way to go!
Other reasons this makes sense:
- You move into the property and learn the property specifics, issues, kinks, etc. and have them fixed before you move out and make it a rental property.
- You also do any renovations and upgrades you need and you are not making two housing payments, like someone would do if they bought a property and were simply rehabbing it to rent it out.
- Lastly, you are more selective and only buy properties that you are willing to live in, and that’s a smart way to go for investors; don’t buy properties that you wouldn’t live in.
Then, after 12, 24 or 36 months, buy your next owner-occupant property and rent out the original one. Then repeat, and repeat, and repeat again once every one to three years.
Buy as a Straight Rental Property
Let’s say you just want to buy it as a straight rental property. First up, you need a 20-25% down payment for most lenders (Fannie Mae and/or Freddie Mac may have some 10% investor properties, so check those out too). And that 20-25%, plus closing costs and renovation costs, might add up to 30% – 35% cash upfront to close escrow and get a property rental ready. So, for a $120, 000 property, that could easily be $40, 000 cash needed. That owner-occupied 3.5% FHA loan sounds pretty good right now, huh?
As noted above, you also need to have good credit and qualify for a bank’s financing for an investment property. One nice thing about rental properties is that the bank may include some estimated net rental income from the property to help your debt-to-income ratios, especially if you buy something with a tenant already in place. Discuss this with your lender.
Speaking of tenants already in place, there are some significant advantages therein too! For example:
- You get the security deposit from the seller at closing and some pro-rated rent
- You probably collect the first month’s rent a month before your first mortgage payment is due
- There is no vacancy, so you don’t need to find a tenant, and
- You probably won’t have to rehab the property until they leave.
The negative could be a lower than market rental rate or a tenant who pays late, doesn’t pay, or doesn’t take care of the property. But they could be a great tenants, too! Once in escrow, do a little looking around the apartment and talk to the tenant to make a determination if you want to keep them or terminate their lease when it ends. Convey this to the listing agent so that agent can alert the tenants either way.
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Home (Historic Photos)
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