RealtyTrac reports that February is one of the best times to buy a home, and with mortgage rates continuing to inch up, the perfect time to invest in a second home as a source of rental income could be right now.
But buying a second home for investment is a big financial decision that can be intimidating without the proper knowledge. To better prepare you to take the plunge in purchasing a rental property, financial website Wealth of Geeks has put together some key factors to consider.
The 1% rule is a standard some use when determining if the investment property is a good risk. According to an article from Rocket Mortgage, for an investment property to be considered a success or a good financial investment, the monthly income should be equal to or more than 1% of the home’s sales price.
• Can you afford a second mortgage payment? Step one is to make sure you have the finances in place to afford an additional mortgage payment. Your debt-to-income ratio comes into factor here, because the max DTI for a conventional loan is 41% for an investment property. In fact, on an investment home, conventional Fannie Mae and Freddie Mac are the only types of loans you can use.
• How to have a second home for rent without committing mortgage fraud. Investment properties and second homes are qualified with different criteria, and if you say you want one kind of property, but it really is the other, that is mortgage fraud. It is important to talk to your lender about the kind of property to make sure you don’t misstep.
• What kind of investment property type are you looking for, and how do you plan on financing it? Once you have looked at your finances and determined that you can qualify, you should look at the kind of investment property you are looking for. To put this in other words, you need to figure out what kind of rental property you want: long-term or short-term rentals. After choosing the rental type, you will want to investigate a financial plan that will help you purchase your investment property. The best option is to refinance your primary residence and use the equity to cover the down payment for your new property.
• Location, location, location. Location seems like an obvious thing to consider, but it is actually vital to purchasing an investment property. Looking at the demand and popular areas to buy helps ensure that you will earn enough in rental income to cover the second mortgage cost.
• Landlord requirements. If you have decided to go with a long-term rental, then as the landlord you need to be accessible at all times. It’s beneficial for landlords to live nearby in case of emergency. Being a landlord doesn’t just stop with maintenance. They are also required to keep up-to-date with rental laws, screen tenants, collect rent, and even possibly deal with delinquent renters. Read more.