How To Mortgage A Rental Property
Purchasing investment property requires work but learning how to mortgage a rental is easy. Purchasing the right rental can bring in consistent passive income which in turns pays your mortgage. The keys to remember are the down payment, location and past rental history.
- Secure the mortgage by securing the down payment. When purchasing investment property, banks often require twenty and sometimes 25 percent down payment. Why? These loans are riskier for banks to offer and since it is not your primary residence, banks feel it is too easy to walk away from your investment. This is also why when you mortgage your rental you will pay a higher interest rate for that loan. What if you don’t have the twenty to 25 percent down payment to put down on your rental property? Fannie Mae offers a program for designated properties that allows investors to purchase these properties with only a three percent down payment and no PMI. PMI stands for private mortgage insurance and is usually an additional monthly fee required when the down payment falls below twenty percent. In addition, Fannie Mae lenders also offer a renovation mortgage which allows the investor the opportunity to restore the property with a secured mortgage. This can not only help you gain higher rental income but keep the property rented for long periods to come.
- Location is the key for rental. Before you search for a rental to mortgage, you have to focus on an area where renters are abundant. Sometimes simply looking at where most of the businesses are situated can offer a good start. Downtown areas offer many employment opportunities. If your rental is located close to a major corporation, this will ensure a higher occupancy rate and top dollar for your rental. Focusing on where the top schools are also helps obtaining rental prospects.
- Look at past rental history. When you are looking to mortgage a rental, look at the past rental history of the property. Any realtor should be able to provide you this information and banks also take this into consideration when qualifying you for the loan. Remember this is a rental, so don’t fall in love. The numbers have to make sense. A good rule of thumb is one percent of the purchase price should equal the monthly rental.
Securing a mortgage for a rental is a lucrative investment option, but you have to do your research. Remember, this is an investment and not your primary residence. As long as the numbers work, so will the rental.