How to finance an investment property

how to finance an investment property

 

If becoming a landlord is a dream of yours, you first need to know how to finance an investment property. There are many different ways to buy this investment property and some of them may even surprise you!

 

Please note that credit score requirements have changed during COVID-19. 

 

Financing Investment Property Option #1: Keeping the house you live in

If starting a portfolio of investment properties is something you have your eye on, many people achieve this by renting out the house they live in and buying something new.

This is a great option to keep the house you currently own but may have outgrown.

 

How does this work? 

Well, all you have to do is find yourself a new house to buy! You’ve likely had some lifestyle changes since you last purchased your home and may need something a little larger. Heck, you may be looking at downsizing! Whatever reason it may be, the house you are currently living in will become your rental property.

Once you’re through inspections on your new home and heading towards closing, I would start advertising your home for rent. This way you can move out and start collecting rent ASAP.

 

What to look out for:

Talk with your trusted real estate professional to make sure you can get enough rent to cover your current mortgage on this property. If the potential rent will only cover the mortgage and nothing more, this may not be the best option for you. (You will have expenses on this property beyond the mortgage you’re paying! Water heaters will break, etc.)

Keep in mind that when you’re not filing homestead exemption on this property any longer, the taxes will be higher.

Also, if you have any vacancies on the property – can you afford the note on this house along with the mortgage on your new home? If the answer is no, then let’s explore other options for financing your investment property.

 

how to finance an investment property

 

Financing Investment Property Option #2: Buying a single-family home

If you love the house you live in, then let’s explore buying a single-family home for you to start renting out. This is the most common way people start accumulating rental properties.

 

How much do I have to put down? 

Single-family investment properties require a downpayment of 15% of the purchase price.

If the house you want to purchase is $150k, then you will have to put down $22,500 and that does not include closing costs.

Conventional loans are the only option for rental property as well. You cannot use an FHA, RD, or VA loan to finance this investment property.

 

Things to keep in mind:

Make sure when you and your real estate agent are looking at potential rental properties that you know what the neighborhood can demand in rent. Nothing is worse than you think you can get $2000/month and it turns out you can only rent it out for $1200/month.

Factor in the age of major house components as well – like the roof, HVAC, electrical, water heater, and plumbing. If these items will need repairs within the next few years, start putting your pennies aside to keep the house maintained.

You don’t want to become one of those landlords that let the house fall into disarray.

 

how to finance an investment property

 

Financing Investment Property Option #3: Buy a multi-family home

Many people love the idea of buying a multi-family home for an investment property. A multi-family home has 2-4 units in the building. Anything above that will require you to speak with a commercial lender.

 

How much money do I need?

If you plan to buy a 2-4 unit property for pure investment purposes, then a conventional loan is your only option. You will need 25% of the purchase price as your down payment and this does not include your closing costs.

Another factor many are unaware of is that financial reserves are typically required as well. The reserve amount will vary and you will need to speak with your mortgage lender about your specific requirements.

 

Things to keep in mind

Much like a single-family home purchase, make sure you know how much rental income you actually get from this property. Have your real estate professional pull the most recent rental numbers for the area you’re buying in.

Many multi-family buildings have not been kept in the best of conditions. Be sure you know the ages of major components and keep an open eye for what repairs may be needed.

You’re never going to find a multi-family unit that doesn’t need repairs – just know what you can handle and not handle.

 

 

Financing Investment Property Option #4: Buy multi-family and live there too

The New Orleans dream for many is owning a double. You can live on one half and rent the other. We can also take it a step further and buy a four-plex and rent the other three.

 

Can I use a VA or FHA loan?

Possibly! Being an owner/occupant of a multi-family home opens up your financing options. You cannot use an RD loan though. Chat with your local mortgage lender to see if you qualify.

Please note that FHA has loan limits for multi-family homes. Also, if using an FHA or VA loan for financing, the house must be in a certain condition. You cannot purchase a fixer-upper.

 

Do I still need reserves if I live in the property? 

That answer will also vary. Each person and their financial situation is different. Talk to one of our favorite mortgage lenders to find out.

how to finance an investment property

 

Financing Investment Property Option #5: Use 15-year loans

The requirements or single-family or multi-family still apply as discussed above. But, if you’re looking to live off of rental income later in life – 15-year loans are an awesome option.

Here’s the scenario: you purchase a new rental property every year for X amount of years with a 15-year loan on each. If you’re 40 now, the first house will be paid off at 55. The following house will be paid off when you’re 56, and so on and so on.

If you purchased ten properties over ten years, they will all be paid off by the time you’re 65. Now your rental income is all yours. (Of course, still factor in maintenance costs!)

 

What to keep in mind. 

These 15-year loans will have higher mortgage notes. Your rental income may not cover the entire mortgage. This is a risk you’re taking – but the extra income, later on, will benefit you greatly if you’re trying to retire early!

Our advice: find cheaper houses to do 15-year mortgages on so you won’t be strapped financially.

 

 

Financing an investment property has many layers. Get in touch with us so we can direct you to an amazing local lender! 

 

If you’re ready to start adding properties to your portfolio, message us now! 

 

 

Extra Costs of Owning a Home

 

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