Are you thinking about investing in real estate? A rental property has a lot of upside, but mortgage loans for rental properties are subject to different rules than a traditional mortgage for an owner-occupied home. With mortgage rules more strict than ever, we hope this article helps you prepare yourself to enter the investment property market.
The first step when preparing to purchase an investment property is to determine how much you can afford. Typically, the prices of investment properties are higher than owner-occupied properties, because rental properties generate income which assists in offsetting the costs associated with owning the property. You are allowed to use the value of this income, along with the value of your down payment, to determine how much you can afford. A rental property will always require a down payment, and the amount can vary depending on your local jurisdiction. Expect anywhere from 20-35%. Don’t forget to add estimates for closing costs and other one time fees, like marketing, property management and repairs.
The next thing you should do is run the numbers for each property you are considering to purchase. Each rental property is like its own small business. There is income, and there is expenses. Do your best to estimate these figures, based on your projected rents per month, principal and interest payments, property taxes, property insurance, property management, repair and maintenance, etc. Chances are, whoever is administering your mortgage loan will want to see your profit and loss projections for the property. The net profit you project will be a factor in deciding whether or not you’ll receive a mortgage loan for the investment property.
Look at getting a pre-approval next. Just like in the case of a traditional, owner-occupied mortgage, obtaining a pre-approval gives you negotiating leverage when you are making offers on a property. Simply put, if two people make an offer on one property, and one person has a pre-approval, while the other does not, the person with the pre-approval looks stronger to the seller and has a better chance of purchasing the property.
If you need assistance shopping for a commercial mortgage or obtaining a pre-approval, a mortgage broker is an excellent resource. A mortgage broker works for you, not one particular bank. They are able to negotiate on your behalf and find you the best deal. In most cases, they only get paid if they are able to secure you a mortgage loan, so it’s in their best interest to try and get a deal done for you.
Last, but certainly not least, is you’ll want to educate yourself on your local landlord and tenant laws. If this will be your first time being a landlord, you should start at this step first. Speak to other landlords and try and learn from their mistakes and experience. In the real estate game, making mistakes often costs you big money. Minimize your chance of making critical errors by interviewing experienced landlords. Pay them for their valuable time. Do whatever it takes to sit down with them for 30 minutes and pick their brain. What was their biggest mistake, what’s their biggest challenge, what books do they recommend you read, what would they do differently if they had to start all over again? Hopefully, you’re able to learn from their experience to increase your chances of success in the investment property realm.