How To Become A Landlord And Invest In Rental Properties
This Article Is About How To Become A Landlord And Invest In Rental Properties
If you are a current homeowner and are looking to buy another property, you may be interested in renting out your current home instead of selling it. In this blog, we will go over the basics of renting out your exiting property and buying another home. This article is intended for novice landlords and individuals renting out a property for the first time. All information in this article should be considered basic advice and not tailored to your exact situation. We always recommend talking to a CPA, management company, and friends and family before making a long-term decision such as becoming a landlord. Gustan Cho Associates have helped many clients rent out their current house and create a passive income stream. If you look at some of the richest people across the world, they are all deeply invested in real estate. Renting out your current home could be your first step to owning and maintaining many-income properties.
The First Step In Learning How To Become A Landlord
So, you have decided to become a landlord!
This can be an incredibly intimidating step. Since you have never done it before, you are now in unchartered waters. In this blog, we will detail what to expect as a first-time landlord. There are numerous pros and cons to renting out your property versus selling your property. Right off the bat, some advantages of owning an investment property include income tax write-offs for improvements and maintenance.
On the flip side, you will pay capital gains tax on the profit (appreciation) when you go to sell the property. When selling an investment property, you will have to pay capital gains tax. If you have been paying attention to the news, the tax rate on capital gains is expected to increase under the Biden administration. This is why we strongly encourage talking to a CPA before deciding to become a landlord.
Can I Afford To Be A Landlord?
Then you must ask yourself “can you afford to be a landlord?” If the plan is to rent out your current home and buy another home, can you afford both mortgage payments? When managing two mortgage payments, you need to prepare for the unexpected. Your future tenant could decide to break the lease at any given moment. You may go months without receiving rental income and be on the hook for two mortgage payments. If you are going to become a landlord, it is encouraged to have ample savings/ reserves in the bank.
There is a reason why mortgage qualifications for investment properties are way more strict than buying a primary residence. A lender understands that in the event of a financial emergency, a borrower is more likely to pay their primary mortgage before paying on their investment property, creating more risk for the lender. You must be prepared for an expensive repair like a furnace or air conditioning unit going out. These expenses will come up and your tenants expect them to be fixed in a timely fashion. Not having savings can be astronomically risky when being a landlord.
How To Become A Landlord And Qualify For A Mortgage On An Investment Home
Can you use the rental income from your current property to qualify for your next home? The short answer is, yes, but we will detail the process below. Since this information is describing a first-time landlord, you cannot technically use rental income. However, you can utilize 75% of fair market rent to help offset your current mortgage payment pertaining to your debt to income ratio when buying your next property. That was confusing, we understand. For more clarification, please call Mike Gracz on 630-659-7644 or send an email to [email protected]
How Much Rent Can I Charge
The fair market rent on the subject property as determined by the appraiser. The appraiser will fill out Fannie Mae form 1007, which is a single-family comparable rent schedule. They will research how much similar homes are renting for in your area. Based on that number, you can utilize 75% of that to offset your current mortgage payment. If 75% of fair market rent is higher than your current mortgage payment, you cannot utilize the surplus as income. You may simply cancel out your current mortgage payment, and nothing additional. Canceling your current mortgage payment for a debt to income purposes will significantly increase your buying power on your next home. NOTE – you may only use the fair market rent IF you have 25% equity (or greater) in your current home. If you do not have 25% (or greater) equity in your current property, you must include your current mortgage payment in your debt to income ratio.
Knowing The Housing And Rental Market
Knowing your local rental market is important. We always recommend that you talk to someone who knows your local market such as the realtor who helped you buy your home or any friends and family you may have who are familiar with the local real estate market. Certain areas of the country have incredibly strong rental markets while others do not. Many individuals have emotional attachments to their current property and may think the rental income potential is higher than it actually is. You need to make sure you can profit enough money to cover any unexpected damages which we will get to later in this article.
Should you use a property manager? This is one of the first questions you must address when becoming a new landlord. If you talk to individuals who have numerous rental properties or have been a landlord for a while, more times than not, they will tell you to utilize a property manager. Looking for the right tenants can be incredibly time-consuming and very difficult. Checking references and credit scores is very common. Typing up a lease can also be complicated. These are all items a property manager can assist you with. Of course, nothing comes free, and a property manager can cost quite a bit of money.
Local And State Ordinances And Laws
Understanding local laws is a must. There are many protections for tenants that you may not be aware of in your local municipality. Certain places in this country make it next to impossible to kick out a delinquent tenant. Sometimes this is referred to as squatting. Every state has different rental laws. Clearly, a landlord is legally responsible for maintaining a safe and habitable property but requirements such as property access and end of lease notifications change based on local law. There are also federal housing laws that do not allow discrimination. Screening potential applicants is a must. You need to be able to trust your tenants to live in your home. You want to pick someone who will have respect for your property and be able to make rental payments on time. Drawing up a lease agreement must follow local requirements. This is something a property manager can help you with. Accepting payments is something to consider as well. You must clearly demonstrate how you expect your tenant to pay you on a monthly basis. The world of online banking has made this process easier with services such as quick pay and Venmo. Recordkeeping is incredibly important not just for tax purposes. In the event that your tenant breaks your lease, you will need every piece of information possible if you happen to end up in court. Of course, maintenance receipts and records of deposits are important for tax purposes. Keep as many documents on file as possible.
Financing Investment Properties
Gustan Cho Associates are your mortgage experts and are available to help you obtain financing to buy your next property. We are a full-service mortgage lender with numerous loan programs available. We do not have lender overlays on our conventional, FHA, and VA mortgage loans. Many mortgage companies have strict overlays surrounding rental income, especially as first-time landlords. The good news is, the Gustan Cho Associates will only go off of agency guidelines and nothing additional. We encourage you to reach out to our team today to get the pre-approval process started to purchase your next home. We can be reached directly at 630-659-7644 or via email at [email protected] Our highly skilled mortgage team is here to assist you in your next home purchase endeavor.
Please check out the reviews of Gustan Cho Associates and you will fall in love with our team. We are available seven days a week and even on holidays. Our team is dedicated to making sure you get the best service in the mortgage industry. Becoming a landlord is a scary but rewarding process. We hope you enjoyed the basic information above and once again we want to reiterate that we encourage you to reach out to your CPA, real estate attorney, realtor, and friends and family before deciding to become a landlord.