The current economic situation and the Fed’s decision to keep interest rates low has left many investors with lower returns than they are accustomed to on their savings.
Some investors are looking for other investment vehicles, and housing might be an attractive option.
Before investing in housing, however, it’s important to take a look at what will be required in order to make money.
Buying the right home is the first step. There are many good single-family houses on the market right now, priced to sell. But it’s important to do your homework in order to get the best return on the dollar. When investigating the market, here are some key considerations: How much do you want to spend; how much money is available for a down payment; what kind of rent would you be able to charge for the neighborhood; and how much will have to be spent on maintenance, taxes, insurance and vacancies?
To ensure that a property investment will pay for itself – and then some – it’s also important to use the right financing mechanism for a housing investment. Fixed-rate financing is the best way to ensure that the monthly principal and interest payment will not change, which can be helpful in determining how much rent to charge.
In order to obtain long-term, fixed-rate financing, the loan will likely be sold on the secondary market to Fannie Mae or Freddie Mac. Therefore, an investment property must be purchased and the title taken in the investor’s personal name, and not in the name of a business. Investors should expect to pay slightly higher interest rates for investment properties then they would pay for personal residences. Typically, fixed-rate financing for single-family units will be about five-eighths of 1 percent higher with a 25 percent down payment.
In addition to meeting normal qualifications, six months of principal, interest, taxes and insurance – or PITI – must be verified to receive fixed-rate investment financing. This requirement is to ensure the investor has sufficient funds to cover payments if the rental becomes vacant. Additionally, rental income from the investment property cannot be used to qualify the borrower initially, so the PITI payment must be covered by personal income.
Access to long-term fixed-rate financing for investment properties also depends on the number of properties owned by the investor. According to Fannie Mae investment property rules, investors can have multiple properties financed, including their primary residences and second homes; however, reserve requirements change depending on the number of properties. For example, the investor would need to have six months of reserves as previously mentioned for the purchase property if the investor has four or fewer properties financed, including the purchase property.
The maximum number of properties the investor can have financed, including the primary residence and second home, is 10. Once investors cross the four-count threshold, they should consult a mortgage specialist to discuss additional requirements.
Once a property is purchased, it’s important to manage it correctly.
Establishing the ground rules will save money in the long run. Decide upfront whether pets will be allowed, because that should factor into security deposit requirements and refund terms.
Some investors may want to consider charging higher rent for allowing pets.
Screening tenants also is a crucial part of managing investment properties successfully. Ask for references and check them. Past landlords, utility companies and credit reporting agencies are very good investigative tools to ensure you’re getting a quality tenant who will take care of the property and pay rent on time.
Making careful choices for property investments will save investors time, money – and headaches. Marita J. Thomas is vice president and residential real estate manager with Empire Bank in Springfield. She may be reached at firstname.lastname@example.org.