Becoming an owner of rental property is a serious decision, one that requires careful research and knowing all the facts. While there are certainly benefits, such as making a good income from the investment, you need to learn all the facts before doing anything.
Buying Rental Property within your Budget
When purchasing rental property, or other types of investments for that matter, expect to go through a loan process. Most importantly, set your budget and always purchase what you can truly afford. Typically, people getting started with rental property should look at smaller, less expensive property and then work up from there.
Remember, in addition to the actual purchase price, some renters are great at paying the monthly payment and others run into difficulties, requiring you to pick up the slack. Additionally, if the home goes unoccupied for any amount of time, you would be responsible for making the loan payments. Then, you need to consider the cost of ongoing maintenance, as well as minor and major repairs. Experts recommend that owners of rental property keep some money in savings at all times for the unexpected.
All about the Location
One of the most critical decisions you will make when buying rental property is the location, which often dictates the quality of renters. For instance, buying a home in a lower income area, or perhaps close to an industrial area or college, then renters would likely fall into a lower income category. Choosing the property in the right location would ensure good paying renters, creating a steady flow of income.
The location of rental property will also play a role in how often the home sits empty. As an example, if you purchase property in an area with a high number of tourists, chances are the winter months are going to be lean, as tourists return home.
Securing the Right Rental Property Loan
Just as you would do when buying your own home, the purchase of rental property would entail taking out a mortgage loan. The type of loan qualified for and the interest rate offered would be based on several factors to include your credit FICO score and your debt to income ratio.
Generally, rental property loans are offered in one of two ways. The first is a Fixed Rate Mortgage or FRM and the second an Adjustable Rate Mortgage, or ARM. Since most people take out loans for a 30 year period, this too is a very important decision.
The Fixed Rate Mortgage is based on an interest rate that would never change throughout the life of the loan. The benefit with the FRM is that you would have a much better idea of ongoing expenses. Mortgage lenders try to get buyers into this type of loan when interest rates are low. The Adjustable Rate Mortgage is different in that an interest rate would vary depending on the current market. Keep in mind, if you were looking to buy a rental home at a time when rates were extremely high, the ARM would be the better option.
Author Resource:
Frank Hendrickson is a real estate investor based in Boston. He is a former estate agent and writes widely about issues related to real estate and finance. His latest project is to establish an information portal on http://www.sellhousefast.co.uk/ both in the US and UK.
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