With rents continuing to increase, you may be thinking about buying an investment property so you can collect rental income. So what is involved in buying a rental property? The process is similar to buying your own home but the rules are a bit stricter.
Here are some of the guidelines for buying an investment property:
- Minimum down payment: sometimes you can do 15% down, but depending on the property you may need 20-25% down.
- Maximum debt to income: your total debt usually can’t be over 45% of your gross income. This includes your current home and the new rental property, although you can use the new rent to offset your rental property payment.
- Cash reserves: usually you will need about six months of reserves, this is equal to six months of house payments in case you do not have someone renting your home.
- Documentation: expect to need at least one year, frequently two years of tax returns along with w2’s, most recent paystubs and two months of bank statements. Depending on your situation there may be more documentation required.
Lenders will usually add your rental income to the your file to help offset the mortgage payment. However they will not use all the rental income, usually there is a limit of 75% of the future rental income. The rental income is usually calculated based on information from the appraisal.
Interest rates are typically higher than an owner occupied home, simply because it is a riskier investment. If a borrower gets into financial trouble, they will usually keep paying on their primary residence but may let the payments lapse on an investment home. The rates can be anywhere from .50 to .75% higher than an owner occupied home. It will vary based on your credit score and the type of home you are buying. Rates tend to be higher on a 3 or 4 unit home than a single family home.
You can purchase any type of home as an investment property – it can be a single family home, a condo, duplex, 3 or 4 plex or a townhome. If the property is a condo or townhome, you may need to make sure the association will allow rentals.
Investment properties can be a great way to supplement your income but remember you also need to take care of the home and fix anything that breaks! Some investors will hire a management company to take care of renting the home. Just make sure you set aside money for potential repairs and vacancies!
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
