Financial Facts: Financing investment property
Ryan Summerlin November 10, 2012
Here in the High Country, many properties are purchased as investment properties. The buyer anticipates at least a break-even financial situation by long or short rentals of that property. And, in some cases, the owner will actually see a fair income from the investment property, if the property was purchased for a reasonable price.
If you are interested in purchasing a rental property or you are looking to buy a new home for yourself and turning your current home into a rental, you need to take a few minutes to read this article.
If you are looking to turn your current home into a rental, you just may have a real advantage over someone who is buying a new property as a rental. The reason is that the mortgage interest rates on rental property are higher than a mortgage for the same amount but on a primary or second home.
The reason for this is vary simple. When you purchase a primary or second home, it is assumed by the mortgage lender you as the resident will keep the home maintained and abuse the property less than a renter. If the property is a rental, the mortgage investor wants to get a little more for their exposure on a property that may be used harder than normal.
Compare it to buying a car for yourself. One car is a one-owner, well-maintained vehicle with a known history. The other car you are looking at is in a rental pool at DIA, and even though you have maintenance records, you assume the vehicle has been abused. Which vehicle would you buy?
So if you already own the home that will be converted into a rental, you should already have a mortgage on it. You are not required to refinance the mortgage just because you make the conversion to a rental. Consider yourself at least a quarter percent ahead of the mortgage curve.
If you are buying a new property as a rental, you need to know the following facts. The first fact is the mortgage rate is going to be at least a quarter to one-half percent higher than that of an owner-occupied home. This is due to the anticipated use and possible abuse.
The second thing you need to know, especially if you need to show on the mortgage application the expected rental income to qualify for the mortgage, is only 75 percent of the rental income is used as income. This is due to the fact that it is anticipated that 25 percent of the income is needed to pay for maintenance. If you expect to rent the property for $1,000 a month, the mortgage investor will only use $750 as income.
Other facts that you need to know right up front are monthly or annual home owner association fees, possible special assessments and utility costs. These all figure into your bottomline on determining if the property will pay for itself. The other item you need to determine, and it is only a guess, is the potential of appreciation.
If the property is purchased at the right price, you will not only see an acceptable cash flow during the time you own the property, but will it sell for more than you paid for it down the road.
Now add into the unknown facts the depreciation allowed on taxes, and if you will keep the property rented.
All of these are items to determine prior to making that offer to buy that rental property. Meet with your mortgage professional and accountant prior to even looking for rental property. Know the facts prior to signing on that dotted line.
For answers to your mortgage related questions, call Bob Kieber at (970) 453-4700 or email him at firstname.lastname@example.org. Bob is a local mortgage lender with Centennial Bank. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country. Member FDIC, Equal Housing Lender. NMLS Bank #401640 Broker #289610. For tax benefit information please consult with a professional tax advisor. The opinions expressed are those of the individual, and do not necessarily reflect those of Centennial Bank.