How to Start Investing in Rental Properties
Investing in rental properties can be an excellent way to earn monthly income on the side, but you’ll need to find a way to pay for the property first. Financing a rental property is always easier if you have sufficient amounts of income and a good credit rating. However, there are specific considerations to keep in mind before you delve into rental property investing, including a unique set of rules and regulations that differs from financing a primary residence. If you’re ready to start financing a rental property, a skilled loan officer Las Vegas can help you find a way to finance a rental property that works best for your financial situation.
Investing in rental properties
Primary Residence vs. Rental Property Mortgages
Getting a mortgage for a primary home follows a specific set of rules. Lenders establish certain qualification guidelines for homeowners, including setting minimum credit score requirements, down payments, and debt-to-income ratio. Setting these minimum requirements helps lenders manage their risk. While getting a mortgage for a primary home can sometimes be challenging; obtaining a mortgage for a second home can be more difficult. Lenders often impose more stringent requirements on people looking to finance a rental property because the risk of defaulting on a loan is greater. To qualify for a conventional mortgage, you can make a minimal down payment of just 3% in some cases. However, with an investment property, you’ll need to make a minimal down payment of no less than 20%. The reason for the difference in qualification comes down to private mortgage insurance.
Private Mortgage Insurance
Private mortgage insurance (PMI) is essentially insurance that protects the lender in case you default on your mortgage payment. PMI is required for homeowners when they put down an initial down payment of less than 20%. While PMI allows homeowners to purchase primary homes with a down payment of less than the standard 20%, it does not extend to investment properties. Therefore, you need to make a higher down payment of at least 15% for an investment property. Investment property down payment rates is regulated by the federal financing agency called Fannie Mae, which establishes guidelines that all lenders must follow. Even if lenders follow Fannie Mae’s guidelines, they may require a higher down payment of 20% or even more. (Read more about FHA loans here.)
Investment Property Interest Rates
Before financing a rental property, you’ll also want to consider interest rates. The interest rate for investment properties, experts caution, is often higher than the interest rate on traditional mortgages in Las Vegas. Depending on the mortgage, the difference in interest rate may range from 0.25% to 1% higher on an investment property compared to a primary residence. While that amount may seem trivial, the difference can add up substantially over time. For instance, you may get a $250,000 mortgage for a 30-year term with an interest rate of 4.38%. Together, you pay $1,249 for the interest and principal each month. By the time the loan is paid off, you will have paid a hefty $200,000 in interest. Even a small increase in interest payments for a rental investment, such as an interest of 4.88%, can make a big difference. With an interest rate, you’ll owe about $30,000 more in interest for a loan for the same base amount of $250,000 and the same 30-year term.
When Renting Out Your Properties – Consider Your Tenants
Many people choose to rent out their vacation properties when they are not using them. By doing so, they count on their tenants to pay a certain amount of money per week or month, which ultimately helps pay off the mortgage. Sometimes, rental property investors don’t account for the possibility that their tenants may leave, or the properties may be vacant for certain periods. Therefore, experts always have a backup plan to make sure you can finance a second mortgage if tenants or renters do not contribute any income.
Investing in a rental property may be a good source of additional income, but you’ll need to know the rules and regulations first. Contact us today for expert guidance on investing in a rental property, including learning the differences between financing a primary residence and rental property, and finding a suitable mortgage for your second home.