{"id":6613,"date":"2017-09-14T09:47:18","date_gmt":"2017-09-14T13:47:18","guid":{"rendered":"http:\/\/teammovemortgage.com\/?p=6613"},"modified":"2020-07-13T22:28:16","modified_gmt":"2020-07-13T22:28:16","slug":"rental-property","status":"publish","type":"post","link":"https:\/\/teammovemortgage.com\/blog\/rental-property\/","title":{"rendered":"Everything You Need to Know About Purchasing Rental Property"},"content":{"rendered":"

Whether it is a vacation rental or long term rental, buying rental property could be a big step towards financial freedom.\u00a0 According to the National Association of Realtors<\/a>, buying a rental or investment property actually accounts for approximately 20% of purchase transactions lately.\u00a0 A benefit for investors that are able to buy rentals is that there is a huge need for quality rental properties.<\/p>\n

The amount of renters is continuing to grow.<\/h3>\n

A\u00a0major reason for the large number of renters\u00a0is because the prices or values of properties are \"rentalincreasing above a comfort level for first time buyers.\u00a0 The millennial generation has proven to be a little slower on moving from\u00a0tenants to homeowners.\u00a0 You can’t blame many as they grew up during the mortgage meltdown \/ great recession<\/a>\u00a0and saw the pain of their parents going through tough times.\u00a0 Plus many are straddled with student loan debt<\/a>.<\/p>\n

Although there are great programs for first time and other buyers, there is a great opportunity for investors.\u00a0 Recent relaxing of guidelines have made it easier to qualify for rental properties as well.\u00a0 This includes higher debt ratios allowed, just one year of tax returns for self employed buyers<\/a>,\u00a0and other helpful areas.<\/p>\n

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Rental Property Qualifying Tip<\/h2>\n

It can be tough for buyers to qualify for a mortgage with multiple properties.\u00a0 But when it comes to buying a long term rental<\/a>, we should be able to count 75% of the market rent for the property.\u00a0 The market rent comes from the appraisal report<\/a>.\u00a0 The appraiser will complete a rental comparable schedule which will determine the market rent for the property.\u00a0 For example, let’s say the market rent is $2000 per month and the total mortgage payment with taxes and insurance is $1500.\u00a0 For qualifying purposes, we would multiply the market rent of $2000 times 75% which equals $1500.\u00a0 Since the total mortgage payment would be $1500, the market rent would cover the full payment.\u00a0 In other words, buying this property would not hurt a buyer’s debt ratio!\u00a0 How about that!?<\/p>\n

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Buying a Vacation Rental Property<\/h2>\n

Many have seen the HGTV<\/a> programs that show how investors may buy vacation homes where the \"vacationrental income may cover\u00a0all or a large portion of the property expenses.\u00a0 That would be quite the arrangement!\u00a0 To be able to enjoy a vacation property while rentals cover a large portion of the expenses would be nice, wouldn’t it?\u00a0 Buying a vacation rental has a few differences compared to long term rentals.<\/p>\n

Buying a Vacation Rental Property Using Market Rent<\/h3>\n

As mentioned above, the market rent could be used towards qualifying a borrower.\u00a0 This includes buying a vacation rental property.\u00a0 There is even the possibility of using documentation from the last 12 months from the rental agency to prove market rent.<\/p>\n

Existing Vacation Rental Property Agreements<\/h3>\n

When\u00a0buying a vacation home<\/a>, especially in peak season, there is a good chance there is a vacation rental agreement in place.\u00a0 Buyers would need to honor existing rental agreements as tenants are typically protected in case of a sale.\u00a0\u00a0Keep in mind that an\u00a0existing vacation rental in place could cause an issue with a buyer meeting occupancy requirements\u00a0as a primary or secondary home.\u00a0 But, buying as a rental would give the new owner rental income that is already in place!\u00a0 Not too bad!\u00a0 Then, if desired, the owner can personally use the home during vacant weeks during the off season and even possible during a peak season week.<\/p>\n

Long Term Rentals Versus Vacation Rentals – Which is Better?<\/h2>\n

So you want to buy a rental property but maybe can’t decide which one to buy?\u00a0 There are benefits of long term versus short term rentals.<\/p>\n

[av_table purpose=’tabular’ caption=’Comparison of pros and cons for long term and short term rentals’ responsive_styling=’avia_responsive_table’] [av_row row_style=’avia-heading-row’][av_cell col_style=”]Characteristics \/ Features[\/av_cell][av_cell col_style=”]Vacation Rental Properties[\/av_cell][av_cell col_style=”]Long Term Rentals[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Furnished[\/av_cell][av_cell col_style=”]Comes furnished [\/av_cell][av_cell col_style=”]Usually not furnished[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Owner Use[\/av_cell][av_cell col_style=”]Between Rentals[\/av_cell][av_cell col_style=”]Rarely[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Rent Amount[\/av_cell][av_cell col_style=”]May Charge More Peak Season[\/av_cell][av_cell col_style=”]Consistent Amount[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Management Fees[\/av_cell][av_cell col_style=”]Higher [\/av_cell][av_cell col_style=”]Lower Fees[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Income Consistency[\/av_cell][av_cell col_style=”]Usually Fluctuates[\/av_cell][av_cell col_style=”]Level Amount[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Utilities[\/av_cell][av_cell col_style=”]Paid By Owner[\/av_cell][av_cell col_style=”]Typically by Tenant[\/av_cell][\/av_row] [av_row row_style=”][av_cell col_style=”]Upkeep[\/av_cell][av_cell col_style=”]Higher to Keep Rented[\/av_cell][av_cell col_style=”]Less Often[\/av_cell][\/av_row] [\/av_table]<\/p>\n

Furthermore, in order to make the right decision, you should involve a Realtor that is very knowledgeable with the area as well as real estate as an investment.\u00a0 Realtors may prepare a market analysis for value as well as rental income projections.<\/p>\n

Not Everyone Wants to be a Homeowner<\/h2>\n

A big reason to purchase a rental property is because not everyone wants to be a homeowner.\u00a0 So buying real estate as an investment not only serves the owner, but also the rental community.\u00a0 There could be many reasons someone may choose to rent rather than buy.\u00a0 Someone may have some credit issues,\u00a0making sure they want to live in the area first, or just\u00a0saving up money for now.\u00a0 It could even be the person or family may not want to incur potential repair expenses of a home.\u00a0 Therefore buying an investment property could serve these needs of the rental population.\u00a0 There are so many ways to get into real estate investing which we explain in a recent article “How to Get Into Real Estate Investing and Build Wealth<\/a>“.\u00a0 So check out this article for some ideas you many not have thought of!<\/p>\n

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\nBuild wealth through rental properties
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How Much Down Payment for Rental Property?<\/h2>\n

So if you are going to purchase investment property, then you will need to know how much down \"rentalpayment is required.\u00a0 Actually it is possible to put down as little as 15% on a rental purchase.\u00a0 Keep in mind though that it will be the most expensive option in rate and mortgage insurance<\/a>.\u00a0 The lending agencies charge based on risk\u00a0which include property type and level of down payment.\u00a0 Since the home is not a primary residence and if times get tough, the owner would likely let the rental go before his\/her own primary residence.\u00a0 Additionally if the buyer of a rental puts down the minimum funds, that increases risk as well.\u00a0 Therefore,\u00a0rentals\u00a0have some of the highest\u00a0risk, thus why the rates are higher.<\/p>\n

Even though 15% down is allowed on rentals, the most common down payments are 20% and 25% down.\u00a0 Just like above, the more risk then the more the cost \/ rate.\u00a0 So 20% down would cost a little more than 25% down.\u00a0 There are some additional requirements for investment property purchases.\u00a0 First of all, the whole down payment must be from the borrower’s own funds.\u00a0 For instance,\u00a0down payment\u00a0may not be a gift.\u00a0 Although, it could be from a home equity line or borrowed against other qualified assets.\u00a0 Lastly, the seller may contribute towards buyer closing costs but the maximum is 2% of the sales price.<\/p>\n

A Few More Points About Investment Properties<\/h2>\n

Rental property mortgages are available only through conventional financing such as a Fannie Mae or Freddie Mac mortgage.\u00a0 Therefore USDA, FHA, and VA\u00a0are not available to purchase\u00a0rental or even 2nd home properties.\u00a0 As far as credit requirements go, it helps tremendously to have higher credit scores to qualify.\u00a0\u00a0Additionally this aids in getting\u00a0a better rate.\u00a0 Although higher scores help a lot, it is not absolutely necessary to have high scores as even a 640 score is possible for rentals.<\/p>\n

What if you don’t have access to the down payment required on a rental?\u00a0 What if you called it a primary residence to get around the requirements?\u00a0 Then read below and think again!<\/p>\n

Occupancy Fraud: Don’t Lie on Your Mortgage Application!<\/h2>\n

Calling a rental property a primary or vacation home is one of the most common types of mortgage fraud.\u00a0 Some buyers purposely try to skirt guidelines, while others innocently look for the best terms.\u00a0 So a mortgage lender question is typically posed like this, “Will this purchase be for a primary, secondary, or rental property?”.\u00a0 A common, but wrong answer from many applicants is “The one that gives the best rate and lowest down payment!”.\u00a0 This may not sound bad, but it is the start to a very bad path that a buyer should not take.\u00a0 Some are bold enough to ask “How would anyone know what we do after closing?”.\u00a0 Well, there are some very high tech resources that lenders and agencies use to determine occupancy fraud.\u00a0 If the loan was indeed misrepresented, then\u00a0it may be discovered.\u00a0 Plus the lender or lending agency\u00a0such as HUD<\/a>, VA<\/a>, or Fannie Mae\u00a0have many remedies including:<\/p>\n