Property is still considered to be one of the best investments for any investor. And while there are multiple different ways to invest in properties. From purchasing their homes to REITs, mutual funds, or ETFs, there are plenty of options depending on your available funds to invest and your expected outcomes and level of responsibility.
And while there are options open to most investors, many still choose to go down the rental route for their property investment for both residential and commercial buildings.
But before you step foot on the landlord side of property and take on a mortgage, here are some things you need to know.
The Lending Rules Are Stricter
You may have been approved for a property you reside in, but being approved for a rental property is a completely different ball game. And both purchases are treated differently.
For rental properties, lenders automatically assume a higher risk of late payments or vacancies, and this translates to borrowers requiring a higher deposit. You’re talking around 15-25% for investment properties, and your interest rates will also be higher if you qualify, even with a strong credit score.
Some lenders may request evidence of cash reserves, while others may have different requirements. But before you move forward, be aware that there are more hoops to jump through, and they’re not as easy to clear.
Rental Income Counted as You Expect
This is something you need to understand. Firstly, projected rent will not automatically help you qualify for the loan.
What applies is determined on a lender-by-lender basis, and some may:
- Only use a percentage of the expected rent
- Require an existing signed lease
- Ask for an appraisal, including rental comparables
And if you’re buying a vacant property, the rules will be stricter again. Rental income projections might look good on paper, but these numbers are not guaranteed, and lenders will be aware of this.
The Type of Rental Matters
Not all rentals are the same. And lenders don’t have blanket rules for investment properties.
Lenders see single-family dwellings as the simplest type of property from a lending perspective. And for first-time landlords, this is usually the easiest and safest option.
But once you move into multi-unit properties (duplexes, triplexes, four units), loan terms and risk profiles shift. This is true even if the building is fully occupied, too.
But it’s not just multi-unit properties, it’s shared or multi-tenant rentals where you rent rooms individually, or the setup varies from the one lease one family mode, and this might mean you need to start looking into specialist lenders and brokers for help getting favourable terms for things like HMO mortgages.
A good rule of thumb: the more complex the arrangement, the more the playing field shifts.
You Ned to cover More Than Just THe Mortgage
This is something that trips people up frequently. You need to be able to cover the outgoings associated with the property, even if you’re not collecting rent. You cannot and should not rely on the rental income alone, as this is not guaranteed. Because, as a landlord, you will be on the hook for things like
- Repairs
- Upgrades
- Insurances
- Property taxes
- HOA fees, if applicable
- Vacancies
- Legal or tenant-related costs
- Management fees if you use a management company
If you cannot comfortably accommodate these expenses or have a separate fund dedicated to this alone, then you need to reassess because rental income is not guaranteed or reliable and should not be your sole way of affording any of the above or other expenses.
