How Much Should I Put Down When Buying Rental Houses?
When you are going to purchase any property, you need trusted professional who would assess the value of the property and make an estimate of the value of the property. The purpose of buying a rental house is to receive rent from their tenants. The investors tend to make more money by increasing rents whenever a lease term expire and even when tenants are renewed.
But banks find it very risky to finance the investment properties and hence they charge higher rate of interest and add more points in the loan agreement than the usual mortgage papers. This is because, the bankers think that since it is an investment property to rental houses, the house will be occupied by the tenants and hence the owner will have less or no attachment for his property. The owner wants to make money out of the rent and hence may sell it when he gets the higher price for it. So he may not have the interest to pay the loans if there is no tenant or if his financial condition becomes tight. In that case his rental house would be his secondary option and he would spend to pay his basic needs at first.
Higher interest rate in Banks for buying Rental houses
So investment in rental properties is very much different from mortgaging a home for one’s own use. Even though with a very good credit rating, the interest rate will be around 1.5% to 2.5% higher in case of buying rental properties than the repayment amount of mortgages. So while buying a rental house, the banks expect that the investor should pay a higher down payment. About 20% of the total value of the property must be the down payment as per the bank rules and regulations. It is good if one is interested to pay more than that. Then the risk of defaults in repayment becomes lesser. For a commercial bridge loan, you will need 35% generally as credit takes a back seat in underwriting.
Seller financing is the best option for buying rental properties.
In the process of seller financing only 10% of the whole of the property value needs to be deposited as down payment. Seller makes the interest payments only and the bulk amount by 60 months. The seller also does not charge any processing fees and only feels happy if he can get upto 6% to 7% interest.
Taking money from the private lenders is the second option.
The private lenders get more interested in investing money in houses. They find it to be a better alternative than investing money in stock market or in share trading. In investing into homes, they get a guaranteed return of 6% to 7% of the invested amount. So they consider it to be a better alternative.
Planning is must for loans for buying Rental houses
A proper planning need to be formulated before applying for loans for buying the rental houses. A quote should be taken from all the prospective financers. The copies of the terms and conditions for each of them are also kept. A careful analysis is required so that the investor can take the right decision about which option to select for getting the finances for buying the rental house.