Rental rates continue to climb in Philly and across the country, which can present a limited window of opportunity for those looking to invest in a rental property. On one hand, the continuous upward spiral for house prices has meant that more people are being priced out of investing in real estate or rental properties. On the other hand, with interest rates still relatively low and a widening gap for available rental properties, there has never been a better time to invest in a rental property - if you can finance it.
Understand The Difference Between Traditional And Rental Property Mortgage Application
While the application process is similar, the consideration process for a rental property mortgage is very different. Rental properties tend to be viewed as higher risk. This is partially attributed to past statistics which have shown that rental properties have higher default rates. In fact, recently published research from RealtyTrac found that more than 50 percent of U.S. counties were at risk for increased rental property defaults last year. This often means that mortgages for rental properties can come with slightly higher interest rates.
There are also specific regulations you need to adhere to if you get approved for a rental property mortgage. You may find the minimum downpayment for a rental property is higher than that required for a home residence. Additionally, don’t be surprised if lenders ask for details of your employment history or previous experience as a landlord, and not just your credit score.
Capitalize On Built-Up Home Equity If You Can
If you already own a home and have built up some equity, you can utilize this to finance your real estate investment with the help of home equity loans or cash-out refinancing. Ensure you spend time understanding the difference between them as well. For instance, home equity loans use built-up equity as collateral. Therefore, if you have a relatively good payment history and credit score, this form of secured loan can give low-interest rates. Meanwhile, cash-out refinancing enables you to extend your mortgage life and take on a new, larger mortgage. The difference is given to you to finance your real estate investment. However, you should only enter into such financing arrangements if you are sure you can maintain the monthly repayments. A home loan calculator can give you a good idea of what your repayments may look like.
Ensure You Have A Fund For Upkeep
A common oversight for investors purchasing a rental property is neglecting to include the cost of property upkeep in their budget when thinking about financing. As a landlord and its owner, most of the onus will be yours to maintain your rental property and ensure it meets all safety regulations. As a general rule of thumb, aim to have between 1 and 1.5 percent of the property’s market value in cash and readily accessible for property upkeep throughout the year.
With the housing market heating up right now, it is a prime opportunity to invest in a rental property. However, making a success of it comes down to not just your pricing and tenants but also the choice in financing. The choices you make in financing your rental property will determine just how profitable it turns out to be in the end.