06 Apr How to Financially Prepare to Buy a Rental Property
Purchasing an investment property is a major financial commitment. Plan accordingly and you’ll be able to move forward with the purchase of your new rental property in full confidence. Alternatively, if you were to rush into the acquisition, you would run the risk of financially overextending yourself and creating unnecessary stress.
Qualifying to Own an Investment Property
Spend some time reviewing your finances along with lenders’ criteria for a mortgage to determine if you are likely to qualify. Ideally, you will have at least 20% of the rental property’s value in the form of a down payment. A 20% or larger down payment eliminates the prospect of paying private mortgage insurance or PMI for short.
The lender will also want to see your proof of income across prior years, tax returns, proof of current assets and your financial liabilities. Once you are pre-qualified for a mortgage on an investment property, you can begin searching the market.
Be Mindful of Your Spending Habits
If you buy a car, boat or another item of considerable value, the lender will likely raise red flags and revisit your mortgage application. It is also a mistake to open up a new line of credit as doing so will make your lender aware that you plan on spending even more money from another lender.
Instead of spending more when preparing to buy a rental home, spend less than usual to make yourself look that much more appealing to your lender. You can always revert back to your regular spending habits after income starts flowing in from your rental property. But, do be mindful that owning an investment property means that you will need a reserve fund at all times.
Ensure Your Credit Score is in Good Standing
Even if you own a home and a business, there is a chance your credit score will not qualify you for a mortgage on a rental property or a mortgage with the terms you desire. If you are overextended with credit card debt, a mortgage, student loans and/or other lines of credit, your application for a rental property mortgage might be denied.
Take a close look at your credit report, push for inaccuracies to be corrected and pay down your debt to the best of your ability prior to applying for the rental property mortgage. Improve your income to debt ratio and you’ll maximize your chances of obtaining a mortgage with favorable terms. Attain a credit score of 740 or better and you’ll snag the best possible mortgage interest rate. However, if your credit is below 700, you can still obtain a rental property mortgage if you have a comparably large down payment and meet other requirements.
Build Your Savings
Purchasing a rental property will be that much easier if you have a significant percentage of the property’s value available in cash. Even if you don’t spend all or most of the cash you have saved when purchasing the property, the mere fact that you amassed such a financial nest egg gives prospective lenders confidence that you are financially responsible and have sufficient financial means for purchasing a rental property. Your cash nest egg will help cover the 20% down payment necessary to avoid private mortgage insurance (PMI) and also pay for ongoing maintenance to the property.
Standard Down Payments and Loans
Ideally, you will save at least 20% to 25% of the property’s value. This percentage will be used as a down payment on the rental property. If possible, amass even more cash before approaching lenders for a rental property mortgage. The more cash you have saved, the better your chances are of landing a low interest rate mortgage that is either 15 or 30 years. Fail to amass considerable financial savings and the lender won’t have the confidence necessary to extend a 15-year mortgage offer as the monthly payment for such a note would be egregiously high.
Stockpile cash, show proof of consistently high income across the previous years and the lender might be willing to extend a 15-year mortgage offer with a comparably low interest rate. Alternatively, if you don’t want to pay as much on a monthly basis toward the rental property loan, a 30-year note with a slightly higher interest rate is your better option.
Your Finance Team: Lender, Agent and Property Manager
You don’t have to go it alone when purchasing a rental property. Your lender and agent will be at your side to facilitate this important transaction. The lender helps you determine the right type of rental property that is suitable for your financial situation as well as the loan amount you will qualify for.
Your agent will help in the context of running the numbers to guarantee you are buying a property that makes financial sense. Lean on your agent for guidance and he or she will do the math to verify that your rental property purchase is optimal for your goals in the long-term.
Though you can manage the rental property on your own, it is easier to view it as an investment property and lean on a property manager to handle its ongoing maintenance needs. Your Austin property management specialist will collect monthly rent from tenants, handle accounting duties, coordinate repairs/maintenance as necessary and ensure that you’re following a strategic plan to meet your long-term financial goals with that investment property.
Call 1836PM Today!
If you’re investing or plan to invest in the greater Austin, Tx, area, reach out to our team of professional property managers today to assist you with your real estate investing ventures. At 1836 Property Management, your success is our success.
By: Kayla Gonzales, 1836PM Marketing Manager