In the United States, landlords earn nearly 45 percent above the average household income. Renting out an investment property is an excellent way to earn passive income.
If you're considering investing in a rental property sometime in the future, you'll need to think about how to finance your rental property. Rental property loans are an option many investment property owners turn to.
But rental property loans aren't exactly the same as the type of mortgage you'd use to pay for your primary residence. For one thing, rental property loans typically have more requirements you'll need to meet to get approval.
Keep reading to find out everything you need to know about getting a rental property loan.
What Is an Investment Property?
A rental property loan is also called an investment property loan. An investment property is a property you acquire to earn additional income.
An investment property can be anything from a single-unit condo to a commercial high-rise, but the most common types of investment properties are residential.
You may or may not live on the property. But the primary purpose for owning it is to rent it out.
Some rental property owners choose to manage the rental property themselves, while others appreciate the benefits of using a property management service.
How Do Rental Property Loans Differ From Regular Loans?
In general, rental property loans have higher interest rates than loans for primary residences. They also require that the buyer put down a larger down payment.
Still, rental property loans are amortized over 30 years. Like primary residence loans, you can depend on paying the same amount for your mortgage each month.
The reason interest rates and down payments are higher is that investment property loans are riskier from a lender's perspective. If the investment doesn't go well, the borrower is likely to walk away from it.
One benefit of a rental property loan is that interest payments are tax deductible. Another is that the larger down payment reduces your loan-to-value ratio, which results in a lower mortgage debt service payment.
Types of Investment Property Loans
There are several programs to choose from when you’re purchasing investment homes. The most common types of rental property loans include conventional loans, FHA loans, non-qualified mortgage loans, and home equity loans.
How to Qualify for a Rental Property Loan
The next step is to qualify for a rental property loan. Every lender has different requirements. Here are some of the common requirements you'll need to meet to qualify for a rental property loan.
Rental property loan qualifications can include meeting the minimum credit score of 620 and having at max a 36 percent debt to income ratio.
You'll also need to be able to provide a downpayment of 25 percent or more and have cash reserves to cover six months of mortgage payments.
More Investment Property Solutions
The average person can't afford to buy an investment property outright in cash. If that's your situation, rental property loans are the best option for financing a rental property.
If you already own and manage a rental property, you know how much work it can be. In order for a rental property to truly generate passive income, consider using a property management service.
Contact the Miami HomeRiver Group to learn more about their excellent Florida property management services.
