Image courtesy of Flickr, Jakob Montrasio
The rental property business is booming, but getting started often requires financing . This article will help you understand the basics of financing a rental property.
You may have heard it's a good time to buy rental property to get started in the property rental business (becoming a landlord). While the economy is in an excellent position for it, in some locations, obtaining financing is not always easy. However, investors with sufficient credit and income have options available to them.
We will discuss what rental property is, both Owner-Occupied and Non-Owner Occupied financing, as well as a few requirements you may face to help you decide if the property rental business is right for you.
Rental properties can be residential or commercial. They are properties which the owner (landlord) allows the occupants to use under a month-to-month rental or an annual lease agreement from which the owner (landlord) receives a monthly income. Rental property can also be referred to as Income Property.
There are two distinct types of rental property. Financing is a little different for each type.
1. Owner Occupied
The simplest way to get into the rental property business is to buy an owner occupied property. This means buying a home and then living in it for a period of time before renting it out, or living in one of the units and renting out the remaining units.
This is an excellent option to boost your potential income while living in the property as well. The reason this is "better" is that the financing terms are much simpler-in fact, you may even qualify for an FHA loan or other low interest rate options with owner occupied financing.
2. Non-Owner Occupied
In some cases, it is impractical or impossible to go the owner occupied route. In this case, a non-owner occupied rental property is alternative option. Depending on the lender, you may need a higher down payment than you would with an owner occupied property and you may need a better credit rating to qualify for loans on these property types.
Depending on your particular lender, the interest rate for a loan on this type of occupancy will be higher than an owner occupied loan.
Like any type of loan, there will be certain requirements you have to meet. Each will vary, depending on the home and loan you choose. It is wise to spend time learning about the requirements before you begin the search for your rental property. Some of the requirements you may need to consider are:
|Income||Debt-to-income ratio is a crucial factor in many lending decisions. Most lenders are prefer that your monthly debt payments are at or below 36% - 43% of your monthly gross income (including the subject property).|
|Down Payment||Down payment requirements are typically higher for non-owner occupied rental properties than an owner-occupied property. 20% is often considered the standard minimum, though 30% may be more accurate when you factor in other fees. These tips can help you put together a simple savings plan for a down payment on a future purchase loan.|
|Credit||Requirements will vary depending on the lender and the terms. Lenders prefer to see higher credit scores for rental properties than a loan for a single family home. A score of 700 is a good reference, where a score below would give you higher rates and less favorable terms and above 700 would give you lower rates and better terms.|
|Documentation||You will need a credit report, purchase agreement, two years of tax returns and many other documents before you are approved for a loan. Find out exactly what documents are required before you being the process. You will reduce the time it takes to approve and fund your loan by accumulating these documents ahead of time.|
Nearly all local and national lenders will have loan programs available for rental/ income properties. Buying rental property is a bit different than a typical residential home, so spend some time researching lenders with resources and guidance available to help you make your purchase. Learn more about how to choose a lender for rental/ income properties.
While the process of buying your rental property may be a bit overwhelming at first, the results are often very rewarding. Do not stress! The process appears to be complicated, but it is done so to protect everyone who is involved in the transaction. Soon, the process will be complete, and you can reap the rewards of income property ownership.
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