Financing Rental Property Investments
After years of facing a real estate market slump, it seems as though we are really beginning to see the silver lining. For those who have been waiting for just the right time to get into the real estate investment business, now may be the time. Overall, experts believe that the market has already hit rock bottom and will only pick back up from this point on, meaning that now may be an opportune time to invest in real estate, more specifically, invest in rental property. Financing a home purchase, however, for an investment property, is a bit more difficult than obtaining a mortgage loan for a primary residence.
Mortgage loans for rental property are referred to as “non-owner occupant”, or NOO, loans. Generally, guidelines for financing non-owner occupant properties are more stringent than owner occupied, or OO, financing. For starters, your interest rate will likely be higher for your NOO than for an OO loan. Furthermore, you will almost always need to have a minimum down payment of 20 percent of the purchase price when financing a purchase that is an investment or rental property. In addition, most of the assistance programs that are available for OO mortgage loans do not apply to a NOO loan. You will also probably need very good credit and a stable employment history showing sufficient income to justify the loan. Although lenders may see the income potential of the property, they will look at the loan in terms of whether or not you personally can afford the mortgage loan, not whether a renter will cover the expense. Because being a landlord comes with inherent problems and instability, a lender will need to be convinced that you are financially stable enough to take on the additional expense. However, there are a number of different options that may allow you to enter the investment or landlord business more easily.
One option is to decide to move into the new home yourself and rent out your current home if you have lived in it for the required period of time. In most cases, an OO mortgage loan requires the borrower to live in the home for at least 12 months. After that period of time, the borrower can move out and rent the home under the same mortgage loan terms, essentially converting your OO loan to a NOO loan but without changing anything. If you do not currently own a home, consider purchasing one with OO financing and then living there for the required time period. After that, find your dream home and rent out the first home. Keep in mind that real estate investments should not be taken lightly as it involves a tremendous amount of money and complex legal documents. This is where a professional real estate agent can come in to help! Although it is not required, it is highly recommended that home buyers turn to a licensed agent for any specific questions regarding their real estate transactions.
Another way to earn some extra income and slowly enter the landlord business is to rent out one or more vacant rooms in your own home. Again, this provides income and a way in which you can have sort of a “trial run” as a landlord before you invest in a second home.