How to Finance a Rental Home
If you choose a good property in a good location, purchasing a rental home can be a profitable investment. However, it's important to do your homework when looking at rentals because if you don't have a lot of renters in your area or you end sinking a lot of money into costly repairs, you could end up on the losing end of what seemed to be a good idea.
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Instructions
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Research your location thoroughly. Be sure you can rent the property for at least as much as you're paying per month on it. Read the newspaper and talk to people in the area. Find out if the area is growing and if the schools are good.
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Check your credit report and score. If you intend to finance your rental home with a bank, your credit will need to be in excellent shape. If it's not, work on correcting credit issues or consider alternative forms of financing.
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Look for a property in your price range. If you have the time and inclination, look for a property that needs work. A "fixer-upper" will require an investment of time and money, but you won't be putting that money into a mortgage each month. Instead, you'll pay less overall and, once its fixed up, you'll be able to charge more in rent than you are paying on a mortgage.
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Go through the expected operating expenses before deciding whether to finance this property. You'll need to pay the mortgage, insurance, taxes, utilities (until it's rented), and for all maintenance.
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Save at least 20 percent of the purchase price for a down payment. A bank is less willing to work with someone for less if the property is going to be a rental property.
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Apply for a mortgage through a bank or lender. In addition to the down payment, you need to prove that you can afford this mortgage in addition to any other mortgage you might have. Most lenders will not consider potential rental income on a vacant property.
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Consider alternative methods of financing for your rental property. Some owners may be willing to finance the property themselves in order to get out of it. If the property requires a lot of work or the owners have moved away from the area, they may not want to rent it out themselves. However, if you offer them a good-sized down payment and take over all other costs, you might be able to invest in rental property without having to jump through a bank's hoops.
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Look for an independent investor. If you have found a really good deal on an apartment building, for example, you may be able to convince other investors in your area to help you out. If you intend to live in the apartment building and be on call for maintenance and the like, you may have a better time convincing investors or a bank that this is a good investment.
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References
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