Vail Daily column: Owning investment property easier than you think
Many people have found that owning a rental property is a good way to build up a retirement nest egg or to get tax benefits. With the ever-increasing rents in our area, many long-term rental properties will carry themselves if properly financed and carefully managed with a good down payment.
The first thing people often wonder is how to finance a rental property and how much can they get qualified for. The first aspect is the down payment. It is possible to finance up to 80 percent of a rental property, although the cost will be higher than if you put more down. Putting down around 25 percent is ideal.
Next, people ask how much income do they need to show to qualify for a rental property? The answer may be less than you think. Your lender and appraiser will prepare an analysis of the rental income and operating expenses you will probably generate off the property. Typically, that net income can be subtracted from your mortgage payment and you need only qualify for the balance.
To do this, we take your recurring monthly bills such as your mortgage on your residence, your car loan, credit card payments and student loans and add the deficit on your soon-to-be acquired rental property and divide the sum into your monthly income to determine your debt ratio. Acceptable debt ratios vary in regards to your credit rating, down payment, your previous experience as a landlord and the property. Somewhere between 40 to 45 percent of your gross income going for debt service is usually the top limit.
I always suggest that borrowers buying their first investment property be sure they have a Plan B in the event the unexpected happens. Ask any experienced landlord and they will tell you not to expect 100 percent occupancy or that the rent will always get there on time. Somehow appliances such as washers and garbage disposals seem to just break at the worst times (like the hour after you leave on vacation).
If you can’t afford a few missed rental payments and a few unexpected repair bills, then think twice about a rental property. The point is to invest and to enhance your lifestyle, not crimp your style.
Also, keep in mind that long-term rentals often produce a higher net income than short-term rentals. You have less wear and tear on your property, lower utilities and are not dependent on good snow. In general, you won’t be allowed to use rental income from a short term rental property to qualify for the loan unless you are doing a refinance and can show it on your tax returns for two years.
I recall one year long ago when a huge storm shut down the entire front range the Friday before Christmas and thousands of people who had reservations here couldn’t get into Denver, or if they got to Denver they couldn’t leave the city for several days. A lot of people here lost their prime rental income for that year. I had rented my own home out that week and planned on having a nice vacation in the sun. Of course my renters made it through the storm, but then I couldn’t get out of town and spent the week as a surprise house guest of friends. The pitfalls of trying to make a quick buck.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.