By Zillow’s Tali Wee
Having a rental property can be a viable way to earn additional money or even establish a major income stream. However, just like homebuyers, landlords often need financing options in order to purchase a rental property.
Managing a property can be challenging at times. If you prefer to delegate this responsibility, consider hiring a property management company. Before you embark on this journey, it’s important to review these three key areas:
1. Understanding Purchase Strategies
– Owner-Occupied (OO) Loans: Buying a property with the plan to convert it into a rental means the owner must reside there for at least a year before renting. Financing for OO properties is generally favorable as the loan conditions remain unchanged even after the property is rented out. Additional advantages include ample time for renovations, knowledge gain about the property for improved future management, and ensuring the property attracts satisfied tenants.
– Non-Owner-Occupied Loans: Acquiring a loan for a property primarily intended for rental can be trickier. A down payment of between 20 to 25 percent is typically required. Plus, landlords must have a good credit record to qualify. Purchasing an existing rental means the new owners inherit the current leases, along with existing security deposits and partially paid rent. However, the creditworthiness and payment habits of the tenants remain unknown as they were approved by the previous owner. This information becomes relevant if the termination of leases becomes necessary.
2. Gearing Up for Ownership
The past economic climate has made loan acquisition challenging due to stricter lending rules. While non-owner occupied properties tend to be more affordable, they often come with higher fees, although interest rates remain competitive. It’s possible to get a 30-year financing plan at 4.5 percent. A substantial down payment can secure more favorable interest rates. Plus, a good credit score adds a positive advantage to a loan application. Terms can significantly vary over the loan period. Therefore, it’s essential to set aside funds for possible property management expenses and remain updated about rental market trends.
3. Loan Research
Shopping around for the best loan deal makes financial sense when financing a rental property. Both banks and mortgage lenders offer different programs tailored to match specific needs. Choose a lender well versed with investment properties, as they often have the most in-depth knowledge, albeit stricter guidelines.
Investing in a rental property that provides a positive cash flow can significantly supplement your income. Yet, it’s the understanding and implementation of necessary procedures and qualifications that ultimately decide the success or failure of the venture.
