Today I’m here with Trevor Kerr from Gateway Mortgage to help me answer a few questions about financing rental properties.
Q: How much money does it take to buy a rental?
A: It used to be that you had to put 20% down. You can now buy a rental with a minimum payment of 15%. However, you will have to pay a mortgage insurance premium until you get 20% equity in the property.
For example, if you are looking for properties between $150,000 and $200,000, the average investor might purchase a $175,000 house for $35,000 down to avoid the mortgage insurance. If you put 15% down, that would be $25,000
Q: What other costs can the buyer expect at closing?
A: You will have to pay for your down payment, closing costs, and prepaids. Most investors who put 20% down on their house choose to handle their own escrow account to alleviate some of those upfront costs. Either way, if you are looking for a home in that $150,000 to $200,000 price range, you can expect an additional $4,000 to $6,000 out of pocket.
As a property manager, we always recommend that our investors handle their own escrow. It’s just one less thing to worry about. You don’t want to miss a tax or insurance payment, so handling your own escrow can give you peace of mind, especially if you are a new investor.
Q: How do you qualify for another home if you already have a mortgage on your primary residence?
A: The great thing about investment properties is if you qualify for your current house, car payments, or other debts, you generally don’t have to worry about qualifying for two houses. The lender will give you credit for the future rental income you will derive off the rental property.
In most cases, if you buy a $175,000 and put 20% down, your payment will be somewhere around $1,100 or so, with taxes and insurance. Depending on the neighborhood, you can lease that house for $1,500 to $1,700 a month. The positive cash flow offsets that payment.
That is the case throughout North Texas, so qualifying is rarely a problem. 99% of the time, if you qualify for your current debts and you have the down payment, qualifying for an investment property won’t be an issue.
Q: Is investing in real estate that easy?
A: Yes! You just have to have some money and find the right Realtor.
Q: If you are moving up into a bigger house, how can you turn your current property into a rental?
A: This is another great way to start investing in real estate. A big advantage of turning your initial primary residence into a rental property is that the down payment will be smaller. When you buy your replacement home, you may only need 3% to 5% down.
However, in order to count the rental income you anticipate from your current property as income to qualify for your next, bigger home, you have to have at least 25% to 30% equity in the current home.
So, talk to a Realtor to find out what you can sell your current home for, and talk to a lender about pre-qualifying for your next home before you head into that game plan.
Of course, there are a couple exceptions. A VA buyer doesn’t have to have that equity position. Each loan program is a little different, but in general, you need 25% to 30% equity in your current property if you want your future rental income to be used when qualifying for your move-up home.
Q: Why doesn’t everybody do this?
A: Everyone should! Investing in real estate is a great way to build wealth for you and your family. It doesn’t matter how long you plan on holding a property. In general, a buy and hold strategy is a fantastic way to build wealth.
If you have any questions for Trevor, you can reach him at 972-822-7408. As always, if you have any real estate questions, just give me a call or send me an email. I would be happy to help you!