Before jumping into the rental business, you need to learn some very important facts. After all, owning rental property is not just a long-term investment of finances, but also your time. When handled right, rental property can be a great way to make money, from rent but also from building equity. The following are some helpful tips to make the process successful.
Buy Property you can Afford
Most often, rental property involves a loan being secured. For this reason, you need to understand your financial situation so you know exactly how much you can afford to pay. If this is your first time buying rental property, you might consider starting with a less expensive home and then as you gain experience, you could invest in more expensive properties.
Remember, along with coming up with money for a down payment and loan closing, you would also need to cover any difference between what the tenants pay and the mortgage loan. Additionally, if for some reason the renters did not pay, the mortgage would be your full responsibility while you try to collect monies in arrears.
Another consideration for owning rental property is that if the home were to sit empty for any amount of time, all of the mortgage payments would still need to be paid. Then, repairs and ongoing maintenance for the property also needs to be taken care of, which as the owner, would be your responsibility. This is why people going into the rental property business are advised to have emergency funds in the bank.
Neighborhood is Everything
One of the deciding factors on keeping the home occupied is the location. For I instance, if the property would appeal to lower income families, then choosing a home close to an industrial part of the city or community college would help. With this, potential for keeping the home rented would be much greater.
The truth is that location of your rental property will dictate vacancy. If your rental home were located in a city or area of the city frequented by tourists or vacationers, perhaps by the beach or a major tourist attraction, you would have no problem renting the home at peak times but during the winter months when tourism is slow, your vacancy rate would go up.
Mortgage Loan for your Property
Just as with a first mortgage, you need to choose the best loan for your rental property. This would involve talking to several lenders since the interest rate charged would vary, depending on things such as your income, credit score, and outstanding types and levels of debt. When looking at loans for rental property, you have two primary options. The first is a Fixed Rate Mortgage or FRM and the second, an Adjustable Rate Mortgage or ARM. Understanding each will help you make the best choice.
Both types of loans could be taken out for 30 years but they have different features. For instance, the Fixed Rate Mortgage has the same interest rate for the life of the loan. Therefore, the monthly payment would never change, making it easier to manage finances. This type of loan is usually recommended when rates are low.
The other option for rental property is the Adjustable Rate Mortgage but in this case, the interest rate fluctuates based on the current market. Keep in mind, especially for rental property, if interest rates are high, then choosing an ARM would be the better choice. Of course, a lender would provide more details to ensure you choose the loan option that would work best for your situation.
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