Becoming a landlord can be a savvy financial move for those prepared to take on the responsibility. With two or more properties building equity at the same time, you can expand your real-estate portfolio and build your wealth.
Be aware that an investment property is no small undertaking. Go this route only when you understand the legal, financial and personal dynamics involved. If you’ve done your research and think an investment property is right for you, a cash-out refinance from loanDepot can provide the means to your dreams. Call today for more information.
How a cash-out refinance works
A cash-out refinance is a replacement of your first mortgage. It will recalculate your home loan based on what you owe plus the cash you’d like to take out. If you have a second mortgage, the two can be rolled into one first mortgage with additional cash out, providing you have the equity to cover the amount.
When you complete the process, you walk away with a lump sum of cash, new mortgage terms, and maybe even a lower interest rate. If you don’t get a lower rate, it can still be a positive move; you’ll be investing in your future with the down payment for a second property. The cash you receive can be used for anything, including buying an investment property.
Here’s what you need to think about to make this work for you:
The different rules on investment properties
Primary mortgage insurance doesn’t apply to investment properties, so you’ll need at least 20 percent down before you buy. If you want to buy a $200,000 home, this means having $40,000 in cash (which can come from your cash-out refi).
More restrictions are involved with investment property loans compared with primary residences, so you’ll also need an excellent credit score and cash reserves. The assumption is that you’ll be collecting rental income to pay the mortgage instead of regular earnings from a job. And, depending on your tenants, this could be a risky scenario.
Lenders will want to make sure you’re not overextending yourself financially, which means mortgage interest rates are usually higher for investment properties.
Don’t forget that getting a cash-out refi on your existing home in order to fund the purchase of an investment property covers only the down payment (unless you have a cushion built in).
Understand your responsibilities as a landlord
You must understand all laws governing landlord and tenants’ rights, so it might be a good idea to take a class or consult with an attorney in each state where you own a property. As the landlord, you’re legally required to cover the cost of home repairs. If the pipes freeze and burst in the winter, for example, you have to pay for repairs immediately.
As the landlord, be prepared to take calls at all hours and for odd things. Some lessees will be dream tenants who fix their own toilets and pay rent on time. Some will call you when they need a lightbulb changed and will pay rent late. You can minimize the latter by requiring ACH (automatic payment) for rent in the lease terms.
Despite such complications, investment properties can be a great option for those who can afford them. Rental income can become passive income, meaning you don’t have to trade X amount of hours a week for the money.
If you generate enough revenue, it can be wise to hire a property management company to help with repairs, upkeep and renter interaction. A property manager can be an objective third party between you and tenants to make sure both parties’ needs are met and one isn’t taking advantage of the other. They are also likely to get volume discounts and competitive rates from local contractors.
Where to consider an investment property
Chicago and Houston are good areas to buy rental properties because homes there are currently modest and the rents are rising. Both of these factors give you better odds for making a bigger profit margin on your investment property.
A property in an area frequented by travelers could also help you generate a return to pay the home loan. But keep in mind that homes in vacation hotspots, like along the beach or in mountain towns, could come with higher price tags. The premium rates you can charge in season with weekly rentals, however, can really add up. Short-term rental services such as Airbnb can bridge any vacancy gaps while also letting you use the property when you want.
Check out college towns, too. These areas have a high demand for housing, and the need is evergreen since a new class of students rolls in every semester.
For parents who have kids headed to college, an investment property in a college town may be a perfect opportunity. Parents can buy an apartment while their child is going to school, which provides housing for their offspring and generates rental income from roommates. Plus, Mom and Dad can keep the property to continue to rent to students, or sell it once their child has graduated.
If now is the right time for you to pursue an investment property, consider a loanDepot cash-out refi. Call now for more information.
Published May 5, 2017
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