What's the Rent?
If you're thinking of buying a rental property, there are some things you need to know upfront that are important. Buying and investing in rental properties is a popular way for investors to both collect income each month but also the depreciation and long term equity accrual. But as it relates to income, how exactly do lenders treat the income generated from a rental property?
First, if this is your first rental property, lenders won't give you any credit for the income that comes in each month. Yes, the lender knows it's there but as a first time investor, you won't get any credit for the income. The entire property including taxes and insurance is treated as an expense without the benefit of rent. You must be able to qualify for the purchase without counting any rental income. Subsequent rentals? Yes, provided you've been a landlord for at least two years. Lenders want to see that you're able to properly manage the property including collecting rent, paying taxes and insurance and taking care of maintenance items as they arise.
It's also important to understand that getting by the guidelines for the initial rental that lenders typically won't use the full amount of income to offset the expenses of owning it. Instead, most investor loan programs will only use 75% of the income and not the full 100%. Why? Because rental units aren't occupied 100% of the time. As tenants move out, there will be some time to inspect, repair and clean the property to prepare for the new tenants.
Also, it takes some time to properly market the property looking for prospective tenants. The home might be listed to find tenants for a couple of months before a suitable tenant is found. Of course, this directly relates to the current market conditions. Rental properties in or near college campuses are much more common compared with other areas. This all makes sense.
Finally,as it relates to interest rates, financing for a rental property can mean a down payment of 20% or more and rates adjusted upward slightly. Lenders know that the risk of a rental property is greater compared to an owner occupied home. It makes sense that should a property owner run into some sort of dire straits, it's the rental units that will be disposed of first.
Your loan officer will quote you all the interest rates, down payment requirements and qualifying guidelines. Real estate is a great way to build wealth over time, just know what to expect when you go in.