You’ve finally decided to take the leap and purchase your first investment rental property. You’ve done your research on locations, identified some potential properties and now need to line up financing. With all of the recent economic issues in the country, it can be difficult to finance a primary home, and more difficult financing rental properties.
The best advice we can give is to establish a relationship with a local lender prior to identifying the property you pan on purchasing. The last thing you need is for a mortgage underwriter to reject your loan application, leaving you scrambling to find an alternative lender.
Given the choice between working with a mortgage broker or with a direct lender, go with the direct lender. On the surface it seems that the mortgage broker, that will shop you loan to a number of lenders would be the better option. The direct lender, that is in actuality the entity loaning you the money provides a key benefit …working directly with the decision maker (where the mortgage broker is in essence a middleman putting a layer between you and the decision makers.).
Two Ways of Financing Rental Properties
As An Owner Occupant
One of the best ways to purchase an investment rental property is as an Owner occupant. In this scenario you purchase the property and live in it the required 12 months that an Owner Occupant loan requires. Owner Occupant loans offer the best financial terms. With FHA financing you may only need to put 3.5% down.
When you move out in 12 months and lease the property you will be able to keep the original loan in place. Plus the 12 months you are living in the house provide an opportunity to make improvements and renovations to the property. The downside is that you have to defer generating rental income for a year but on a positive side you don’t have to make a primary residence payment and a rental property payment.
As A Rental Property
You can also simply purchase the new property as a rental property. To do this you will need to put a down a down payment from 20 – 25%. You could find some special financing programs with some of the government lending programs, but they are not guaranteed. From an initial cash investment perspective remember that in addition to the down payment you will also need to cover closing costs, escrow and the cost of any improvements or repairs. You may win up needing to come up with 30 – 40% of the property cost to purchase a property in this manner.
Additional Rental Property Financing Items to Know
In addition to the items above some additional things to be aware of include:
Lending Limits: If you are purchasing a single property then limits do not apply to you. If you want to purchase 4-10 properties then you will need to seek out a lender that will loan up to the number you are looking to purchase.
Credit Scores: Depending upon the number of loans you will need to have a credit score of 630 if you are securing 1-4 loans for properties and 720 for 5-10 loans.
Down Payments: If you are purchasing as an Owner Occupant your down payment could be as low as 3.5%. For rental properties you can expect to put 20% down for 1-4 loans and 25% for 5 – 10. If you are purchasing a multi-family unit then you can expect to have to put down 25%.
These are few of the things you need to be aware of when financing rental properties. Of course to make any real estate purchase you need to be able to document your income is sufficient to support the purchases. If the property you are purchasing is currently rented you may be able to utilize the projected rental income to meet income requirements.
In 2015 Fannie Mae made a change to rules regarding homeowners converting their home to a rental property. Previously the owner was required to have at least 30% equity in the home to turn a primary residence into a rental property. The amount of equity requirement has been removed making it easier for homeowners who need to cover their primary residence into a rental property. You can find more info and details at Fannie Mae.
If all of this seems a little confusing don’t worry. GSPM assists property owners and investors in maximizing revenue potential while minimizing the hassles in marketing and managing their properties. We recognize that there are a lot of factors that go into making a property a successful investment and put our experience and knowledge to work for you. Call us at 404-254-4502 or complete our Fast Form below to learn more about our services.