Neuswanger: Making a rental property work for you
Many people buying resort property plan to rent it out for all or part of the year to help defray the carrying costs of the mortgage, HOA fees, taxes and utilities. While rental properties in Eagle County seldom, if ever, break even, the income can be substantial with many village core area properties generating in excess of $100,000 a year after management fees.
Why then, would someone buy a rental property that loses money? There are many advantages to owning a property here, including hopefully using the home part of the year (if you short term rent it that can work out great) and being part of the community as a homeowner. Long term appreciation, while not guaranteed, can be substantial as well. Did you know vacant lots on Forest Road once sold for about $20,000?
Properties purchased as an investment property versus a second home require a different mortgage structure (and the rate will be higher). But in some cases, a lender can apply the rental income against the mortgage payments to help qualify you for a loan. To buy a residential rental property, plan to put 20% to 25% minimum for a down payment. If you are purchasing a multi-million dollar condo with a front desk operation (aka a condo-tel) plan on 30% to 40% down.
If you are buying a condo-tel property and the property will be short-term rented the lender typically will not factor in potential rental income when qualifying you. However, such properties are often long-term rented out, and in that case, the lender may be able to apply the potential rent against the payments in terms of qualifying the borrower.
If you buy a more conventional property and plan to long-term lease out the home the lender can factor in a market-rate rent to offset the payments and you would only need to qualify for the deficit. This can make qualifying for a loan a lot easier if your debt to income ratios are tight.
Typically a real estate appraiser will determine a fair market rent for a particular home and 75% of that number will be applied against the mortgage payment, taxes, insurance and HOA fees. So if you have a carrying cost for the new property of $2,500 a month and the appraiser decides $2,000 a month is fair rent the lender will apply $1,500 against the carrying costs and the borrower will need to show his ability to carry $1,000 per month in additional debt. Depending on your situation, this could make or break your loan approval.
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Generally, the lender looks at your pretax income and your other monthly obligations including your primary housing expense and divides the later into the former. If the result is below 50% the loan is eligible for approval, assuming the borrower has good credit and meets any other requirements in terms of assets, employment stability and credit.
If you had say $10,000 a month income and $3,500 in housing and minimum payments the lender would add the $1,000 per month negative cash flow on the rental unit to your minimum payments and divide $4,500 in $10,000 and you would have a debt to income ratio of 45%.
Assuming you met the other above requirements and have the down payment your loan should be approvable. If you were just buying a second home the lender would add the full carrying cost of $2,500 to your $3,500 other payments and your debt to income would be 60%, which would not work.
Chris Neuswanger is a mortgage loan originator at Macro Financial Group in Avon and may be reached at firstname.lastname@example.org or 970-748-0342. His web site is www.mtnmortgageguy.com.