Buying Rental Properties

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Real Estate

Why buying rental properties gets easier

First time real estate investors find the approval process is very much the same as financing an owner-occupied property. There's a credit report checked, bank statements and assets are reviewed as well as income and employment. Yet there are some additional guidelines rental property financing requires. The first and most obvious is the amount of down payment needed. Most conventional programs ask for a down payment of at least 20% while providing slightly better terms with a 25% down payment.

This is much different compared to a primary residence where the minimum down payment for a primary residence can be as low as 5%. The other is the interest rate on the loan. Rates for rental properties will typically be anywhere from 0.25 to 0.50% higher. But buying a subsequent rental property is much easier. Why?

The first reason might be that the buyers are familiar with financing a rental with the experience gained with the first purchase. Yet the real reason is the way lenders treat the rental income. With the initial purchase, the income from the rental won't be counted. Instead, the buyers must be able to qualify with their current income without the benefit of rent. Even though the unit is rented out and the tenants are paying the rent each month, lenders won't use it when qualifying. With the second rental purchase, the income can be used.

Investors want to see if the income generated is enough to cover not only the financing costs such as the principal and interest payment, property taxes, insurance and an amount reserved for maintenance. If the rent is not enough to cover the costs of ownership, it's very likely the investor will move on to evaluate another property. If there's not enough rent to positively cash flow the investment, it's an expense, not income.

After the first, the second is so much easier to qualify for. This is also a reason that real estate investors soon discover how much easier it is to qualify they ultimately own multiple rental properties. Sometimes to the point of quitting their current jobs and becoming full time landlords. When this happens, it's not uncommon to hand over the job of managing the properties, collecting the rents and fixing things when they're broken to a property manager. For a fee, a property manager will handle these day-to-day activities. All the buyers typically need to do is find another property and turn over the landlord duties to someone else.

Please feel free to contact me if you have any questions, concerns or special circumstances.