Looking for a long-term investment that can provide a steady income stream? Buy rental property. Rental rates are on the rise, which means that becoming a landlord can be especially profitable. We cover the basics and how to finance a rental property so you can get started.
With the U.S. population increasing by one person every 13 seconds, we need more housing. That means investing in rental property can provide a good return on your investment.
Larry Arth, CEO – Equity Builders Group
Larry is founder and CEO of Equity Builders Group, a Florida-based real estate investment group. “Unlike the volatile stock market, rental properties are tangible assets the investor can control more.”
Before you rush into buying a rental, Arth says to keep in mind that rental properties are in demand.
“Today, there are more investors than homes to sell to them. That means it’s a sellers’ market, and buyers must be flexible about how much they pay and how.”
Read this article for more information on how to buy a foreclosed property and renovate it for renting.
Location is everything with rental property financing
To have success with a rental property, pay close attention to location and buy in an undervalued market, advises Arth. “Find rental property for sale in a market where the median income pays for and supports the median home price,” he says. “This factor is influenced by the population growth in the area, as well as job growth and diversity of employment.”
Arth advises staying away from communities supported by one industry. As an example, he gives Las Vegas, which is fueled by the gaming industry and suffers when the economy slows. Instead, opt for an area that is growing economically and contains diverse employers.
Currently, Atlanta, Chicago, Philadelphia, Oklahoma City, Orlando, Florida and Birmingham, Alabama, are communities Arth calls “investor advantage markets.” Prime locations tend to change, so he suggests doing your homework about an area before buying there.
Financing rental property
There are three main options to pay for rental property. Which you choose will depend on your current financial situation and the number of rental properties you wish to buy.
Cash and then finance
Currently, the most popular method of financing renter-ready property is to pay cash and then get financing, says Arth.
“Cash is king, and sellers prefer cash. By paying cash, you’re more likely to get the property, and you can often negotiate a cash price that can save you a lot of money.”
You use liquid assets to buy the property and then get preapproval for a loan. This usually means you’ll have a loan in process when you close with cash. Once the loan comes through, you can replenish your reserves.
- Saves a lot of money—as much as 10 to 15 percent off the asking price.
- Makes your bid more competitive
- Quick transaction
- Requires significant cash outlay
- No assurance of favorable financing terms after the sale
Investment lender loans
If you choose to finance through a lender, such as a bank or an online mortgage company, find one that specializes in investment property. Such lenders understand investment strategies when it comes to rental property.
“Investment lenders are different than lenders for owner-occupied properties,” says Arth. When seeking an investment lender, he also suggests getting one that is licensed to lend nationwide, or at least in several states.
“If you plan on buying rental properties in different states, having a lender that can service all your loans is the most expedient,” says Arth. “Your information is on file with the company, which makes future loans faster to process.”
During your search for a rental property loan, consider peer-to-peer lending platforms, such as Black Hawk Investments Corp., which only offers secured real estate loans.
Like any mortgage loan, you will have to come up with a down payment of 20 to 30 percent. Interest rates for investment property are also slightly higher than for owner-occupied mortgages.
- Less money upfront for you
- You can shop around for the best interest rates
- Cash buyers may outbid you
- 25 to 30 percent down payment required
Designed for investors who wish to buy multiple properties, these loans allow you to finance five or more properties at once. Such loans can be used to finance single family and 1-4 unit structures. You can include property you already own, and the homes can be located anywhere in the U.S.
According to Arth, a multi-property loan may not be attached to your FICO credit score, depending on how it’s structured, and the company you use for financing. You can sometimes get financing based on the property itself, rather than your creditworthiness.
Note: [https://www.supermoney.com/reviews/home-loan/b2r-finance] This company does such loans.
If you apply for a multi-property loan through the Fannie Mae 5-10 Properties program, you can often get desirable interest rates, but you need a credit score of at least 720, six months reserves on each of the financed properties and two years of tax returns for each of the rentals.
- Ability to combine loans for several properties
- May be able to finance based on the property value, rather than creditworthiness
- Fannie Mae program requires high credit score and financial reserves
- Fannie Mae program limits to 10 properties
How to choose a lender?
The lender you choose and the resulting loan can greatly affect how profitable you are as a landlord. For that reason, it pays to compare lenders and weigh all of your options before you make a decision. Keep in mind that terms can often be negotiated. To make an informed comparison, ask each lender for their interest rates, required down payment percentage and any fees.
Buying rental property can be a profitable venture. SuperMoney offers a convenient way to compare lenders. Click here to read expert reviews and user comments on leading mortgage lenders.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.