Thinking about investing in a rental property? Here are a few things to consider.
1) Decide if you really want to be a landlord
Owning a rental property comes with a lot of ongoing responsibilities and many – such as leaky roofs or backed-up toilets – aren’t enviable. You can leave those details to a management company, and have them handle things like getting the right tenants, tenant disputes, and more, but you’ll pay for that service.
2) Consider the first financial steps
Lenders often require higher down payments for investment properties compared to primary residences. It’s a good idea to be prepared to put between 20% to 25% down in cash. And it’s advisable to get pre-approved for a mortgage before you start shopping – preapproval shows a seller you’re serious, gives you a good idea of what you can afford, and what mortgage product is best for you. Investor Cash Flow loans are popular for investments.
3) Drill down on the costs
The monthly mortgage payment isn’t the only cost to consider. You’ll want to budget about 20% to 30% of the rent money a property generates for maintenance and any emergencies — unexpected costs should be expected. Then there are property taxes, rental-income tax, insurance, utilities, landscaping, and more.
4) Make a location checklist
Consider the common factors that make a location a good place to live. These include a good school district, low crime rate, proximity to public transportation, and amenities such as parks and supermarkets. But unlike with a primary residence, you’ll also have to consider location in terms of appreciation versus cash flow. It’s possible for a property in a good area with a high property appreciation rate to have lower rental cash flow, and vice versa with a home in an area with lower appreciation but better returns on rent. Think about whether you are more focused on annual income in the short term, or a larger lump sum down the road when you sell the home.
5) Check out the rental market
Before you buy a rental property, you’ll want to see how other rental properties in the area are faring. What are average rents? You’ll probably need to charge about the same. What is the area’s rental-to-ownership ratio? Check out U.S. Census statistics or stats from the local government to know the vacancy rate.
Are you ready to be a landlord? For that and a range of financing needs, you can turn to Luxury Mortgage. Contact us today.
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