Vail mortgage column: How do you qualify to buy an investment property?
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 as much as 80 percent of a rental property, although the cost will be higher than if you put more down; 25 percent is ideal.
Next, people ask, how much income do they have 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 of the property.
Typically, that net income can be subtracted from your mortgage payment and you need only qualify for the balance. If there is a deficit, then that amount is added to your monthly expenses for determining your debt-to-income ratio.
However, note that this approach only works if you are planning to rent the property long term. Short-terming the property may generate more cash, but the income stream is unpredictable. If you’ve lived here long enough to recall what a low snow year is like, then you know tourism is a fickle star to hitch your hopes to.
But if you are planning to long-term rent your new property, then your lender will take your recurring monthly bills such as your mortgage on your residence, your car loan, credit card payments and student loans and either add the “deficit” to your expenses or the expected profit to your income and divide your expenses into your monthly income to determine your debt ratio.
Acceptable debt ratios vary in regards to your credit rating, down payment and your previous experience as a landlord and the property. Somewhere between 40 percent and 45 percent of your gross income going for your total monthly debt service is usually the top limit.
Have a plan b
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.
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 to enhance your lifestyle, not cramp your style.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.