How to Start Collecting Rent: Investment Properties
I bet you are ready for an easy pay day. How about collecting rent from your tenants every month? So, how do you get there?
When it comes to investment properties, Dave Ramsey had it right…. “Cash IS king” but what if you don’t have bookoos of cash laying around? Financing these properties can be tricky and more difficult than a primary residence! Investors and lenders see investment properties as “risky” transactions, ensuring you pay back these loans in addition to your personal property is a top priority. Before you set your heart on being a landlord, here are my top 5 facts for financing investment properties:
1. 20% down is required
If you don’t have 20% down, keep on saving! You should really strive for 25% down- this gives you a significantly better interest rate due to the adjustments on the loan. A lot of factors contribute to an interest rate, LTVs (loan to value ratios) are one of them. Keep in mind that you will also need to show 6 months of reserves of principle and interest payments in your bank account!
2. Investment property rates are SIGNIFICANTLY higher
They could even be off the chart. If this is the case, you will have to pay discount points to buy the rate down which will increase your closing costs. Property type also weighs heavily into a rate (single family, condominiums, 2-4 units, second homes, investments are all different types of property). Interest rates are tailored to each property, for this reason no one can legally post rates without a disclaimer or APR attached.
3. The house must be livable
In order to get financing, the property must be habitable at the time of financing. This means no safety hazards, no rotting wood, no holes in the exterior (ceiling, floors, windows) no visible mold, and it must have central heating and air (no window units, folks!). The property owner can fix these issues before the house is appraised to avoid any conflicts in financing, this usually happens in the first stages of negotiations (my best advice is to use a good realtor).
4. Credit is everything
Your credit score is one of the largest factors that plays into what type deal you’re able to obtain. If your score is the in the 600’s, you aren’t ready yet, but you can be with devoted attention to getting your score up. If you’re currently in the 500’s… you’ve got a ways to go. Successful investors have credit scores around or above 720 which allows them to have access to slightly better rates. It is never to early to start working on getting your credit score!
5. Monthly debts can really bring you down
If your DTI’s (Debt to Income Ratios) are too high, you may be disqualified from buying. Want to add yours up? Take all your MONTHLY debts (current and proposed) divide by your GROSS MONTHLY income then multiply by 100. You have a percentage that is hopefully below 43%. If you can not afford all your bills plus a proposed new mortgage payment, you need to pay some items off before this new venture.
Buying an investment property can be overwhelming but with the guidance and the right steps you can be on your way to collecting your first month of rent! Contact your local loan originator for more information!