Buying a rental property: everything you need to know

0

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our affiliate lenders that we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276 is referred to herein as “credible”.

Real estate is one of America’s most popular investments – and for good reason. Ideally, you buy a property, pay off the mortgage with rent payments, and keep the profit on later sales.

Demand for investment properties has been rising for several years, and according to the data firm, the biggest push comes from people with fewer than 10 properties in their portfolios CoreLogic.

But as with any investment, there is a lot of work involved – and a certain amount of risk.

What you should know before investing in a rental property:

What is a rental property?

A rental property is a property that is bought by an investor and rented out to tenants. Rental properties fall into two categories:

  • Residential: This includes single-family houses, apartments and condominiums
  • Commercially: This includes office buildings, x, and all other land designated for business use

We will focus on residential real estate. As the landlord of a rental apartment, you can either manage the property yourself or hire a company to take care of matters such as communicating with tenants and ordering repairs. If you decide to sell the house later, you keep any profits from the sale.

If you are in the market to buy a property, Credible can help you easily compare the mortgage rates of all of our partner lenders – it only takes a few minutes and it doesn’t affect your creditworthiness.

Credibility makes it easy to get a mortgage
  • Immediate optimized pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter without impacting your bankroll.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or spammed.
  • A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Only speak to a loan officer if you want to.

Find prices now

Advantages and disadvantages of renting an apartment

While you can make a nice profit after selling a rental property, managing it is a lot of work. Here are some of the key pros and cons of owning a rental home:

advantages

  • Possible profits: When your property increases in value and your tenant’s payments cover all housing costs – such as renting a car mortgage, Insurance, taxes and maintenance – then you will be one step ahead when it comes to selling the house later.
  • Tax relief: Rented home owners can deduct the expenses of managing their property from their income tax returns. These can include interest, taxes, and maintenance costs.
  • Diversification: Financial experts generally recommend investing money in different types of assets to limit risk. So if you lose a lot of money in your 401 (k), for example, you can theoretically still rely on the home equity in your rental property.

disadvantage

  • Possible losses: No investment is guaranteed and you can lose money if property falls in value, it becomes expensive to maintain, or you cannot find reliable tenants.
  • Strict requirements: Since the house is not your primary residence, mortgage lenders may need one deposit of at least 15% with a conventional loan.
  • Active engagement: You either have to manage the property yourself or hire someone to do the job, which eats up your time and profits.

Learn more:

How to buy a rental property

Usually, you need to get a mortgage, find a tenant, and make sure that all of your expenses are covered.

Here’s a quick rundown of buying a rental property:

  1. Set your budget
  2. Get a pre-approval for a loan
  3. Consider property management
  4. Search for potential real estate
  5. Take a look at the landlord’s insurance
  6. Set your rent

1. Set your budget

Even though you plan to have a tenant pay the mortgage, you still need to find out if you can afford it buy a second property and how are you going to deal with it recurring expenses. When buying a rental property, be sure to budget for both upfront and recurring costs.

Upfront costs:

Recurring costs:

  • Property taxes
  • Landlord insurance
  • Maintenance and repairs
  • Property management fees
  • Job offers
  • Homeowners Association fees

2. Get pre-approval for a loan

A Mortgage pre-approval can help you figure out how much money to borrow when investing in rental property. Pre-approval is based on your credit rating, income, and outstanding debts.

When buying a rental property, you can a conventional credit or a FHA loans. Qualification standards vary depending on the mortgage program and may also differ from the requirements for a primary residence mortgage:

  • Conventional loan: Creditworthiness requirements range from 640 to 700, depending on yours Debt-Income Ratio, the number of units you buy, and your deposit.
  • FHA loan: The FHA allows homeowners to purchase a property with up to four units, as long as one of them is inhabited. You need a minimum credit score of 580 when you deposit at least 3.5%. If you can drop 10%, the minimum credit score drops to 500.

Find out: 5 Types Of Mortgage Loans: Which One Is Right For You?

3. Consider property management

Real estate management companies do a lot of work in purchasing investment property, e.g. If you don’t live near your rental property, paying a company to take care of these details can be a good option.

The cost of the service varies by company and location, and also depends on what you want the company to do.

Tip: Calculate at least 8 to 12% of the monthly rent plus expenses. For example, if you billed your tenant $ 1,000 per month, your monthly property management bill could start from $ 80 to $ 120.

4. Finding potential real estate

If you’re a first-time investor, buying a rental property in a new, popular neighborhood can help reduce maintenance costs and costly vacancies. Search:

  • Place: The neighborhood in which you buy the rental property affects the type of tenants you attract and the vacancy rate. For example, a property near a university can be attractive to students, although you may have difficulty renting the house in the summer.
  • Condition of the property: If you choose buy a fixed upper material, You will likely have a lot of upfront repair costs and more ongoing maintenance. While this might be fine if you know your way around home repairs and live nearby, it could be a deal breaker for others.
  • Property taxes: Depending on where the property is located, property taxes can add hundreds of dollars to your home payment each month. If you’d rather keep your costs down, look for properties in areas with low tax rates.
  • Average rent in the area: After adding up your estimated monthly housing costs, see if the average rent in the neighborhood would at least cover that amount.
  • Equipment and potential job market: Drive around the neighborhood and check out the restaurants, parks, gyms, public transportation, and all the other perks that attract renters. Likewise, if there are many job opportunities in the area, you are likely to attract skilled renters.

Try the Credible mortgage payment calculator below to help make your purchase decision easier. The calculator can help you figure out what your monthly payment might look like and guide you into the right price range.

Enter your credit information to calculate how much you could pay

Total payment
$

Total interest
$

Monthly payment
$

With a
$

Home Loans, You Pay
$

monthly and total
$

Earning interest over the term of your loan. You pay in total
$

over the life of the mortgage.


Do you need a home loan?
Credible makes it easy to get a mortgage. It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter.

Find prices now

Checking the rates does not affect your creditworthiness.

5. Look into home owner insurance

If you are renting out your property for an extended period of time – usually more than six months – you will need to purchase a special offer Household insurance.

Landlord insurance covers physical damage to the property itself and potential liability issues and typically costs around 25% more than standard home insurance.

Most landlord policies also cover loss of rental income if you cannot rent the property out during repair or rebuilding due to damage from an insured loss.

6. Set your rent

When setting your rent, it should at least cover housing costs such as capital, interest, property taxes and insurance. Some real estate investors adhere to the “1% rule” which states that the monthly rent should be at least 1% of the total investment.

For example: Let’s say you want to take out a $ 200,000 mortgage on a rental property. How to use the 1% rule:
$ 200,000 x 0.01 = $ 2,000
The number of $ 2,000 is your minimum monthly rent.

Shopping for a mortgage can be stressful. Fortunately, Credible streamlines this process and makes comparing multiple lenders easy.

In the table below, you can see pre-qualified tariffs from our partner lenders in minutes – tariff checking is free and you don’t even have to leave our platform.

About the author

Kim Porter

Kim Porter is an expert on credit, mortgage, student loan and debt management. It has been featured in US News & World Report, Reviewed.com, Bankrate, Credit Karma, and others.

Continue reading

Leave A Reply

Your email address will not be published.