Are you thinking about buying a rental property or maybe buying a new home for yourself and keeping your home as a rental? It happens frequently. Sometimes a friend mentions that they have a rental home and make money every month, sometimes someone you know says investing in real estate can be a great way to make money. So the big question – how to start? Should you start?
For some, it's an easy answer – they can advertise for tenants, have the ability to make repairs, don't mind phone calls to fix things – at all hours! Others may not want to take those calls and decide to hire a management company. Whatever you decide, the most important thing is to make sure the property you are buying has the potential for a rental. You need to calcuate expenses and figure out if the property will make sense after paying the mortgage, taxes, insurance, expenses and allowing money for repairs. Make sure you allow extra to set aside for potential repairs or if the property is empty between tenants.
How do you buy a rental home? Most people will either turn their current home into a rental or take out a mortgage on a new property. If you decide to turn your current home into a rental and buy a new home for yourself, you will need to qualify for both payments – without the help of rental income. If you can do that, it's a great way to get started. You can also take out a conventional mortgage for an investment property. Plan on needing at least 20% down – ideally 25%. Rates are slightly higher for investment properties than an owner occupied home. Some look into duplexes – living in one side and renting out the other. That is a great way to get started – you are occupying the property, get rental income to help qualify and have rental income to offset your mortgage payment. You don't need quite as much of a down payment – since you are living it the home, you can use FHA financing also, if that works better in your situation.
Are you thinking you want to flip homes – buy them, fix them up and then sell them? That can happen but most people use cash to buy the homes or "hard" money lending. Hard money lending has different terms than a regular mortgage, typically higher rates and shorter terms. For most getting into real estate investing, it may make more sense to plan on the long term – buy the home to keep for several years and use the rental income to help purchase more homes or towards saving for retirement. I know some people have bought investment homes planning to use them towards their children's education – that may work for you also. Buy them, keep them for several years and sell if you need the money for college educations or retirement. Just remember, the market can change as we saw several years ago and you may not make as much money on the investment as you had hoped. Or you may neeed to sell sooner than you planned and may not make any money.
Educate yourself, look at the properties you are buying and make sure they are in good rental areas. Talk to others that have rental homes and decide if it's a good move for you. Once you decide you want to do this, talk to your loan officer and find out what you can qualify for and start looking!