Mortgaging a Rental Property

English: Offering subprime mortgage.

English: Offering subprime mortgage. (Photo credit: Wikipedia)

Now that we’re down to the last ten grand on our mortgage, we’re starting to look into getting another rental property.  The one we’ve got has worked out pretty well over the last two years, giving us about $800 extra  each month.  We broke even on all of the repairs we had to sometime in the spring.  That’s almost $5000 in pure, almost-passive income.

With numbers like that, if we can get a similar property and keep the mortgage under $800, we should be golden for getting another property and avoiding having it as a new drain on the budget.

However…

There’s always a however.

Our current tenants are moving out at the end of the month, which means the passive part of the income is over while we either find a renter or hire a property manager to do that for us.  Since that came at the same time I got the opportunity to be unemployed, there was a bit of panic at my house.

The idea of having a mortgage, no job, and no renter scared us into waiting to buy another property.

It’s not stopping us from getting ready for the next property, though.

We live in a fairly high-cost area.  Our house is on an eighth of an acre and is valued at around $250,000.   Our rental is on a slightly larger lot, but is a smaller house valued at around $200,000.   We don’t have a quarter of a million dollars laying around waiting to hatch into a new house, so we’ll be getting a mortgage.   A mortgage for a business property is a bit different than one for a home you’re planning to live in.

First major difference? You need a 20% down payment, with a 25% down payment getting you a much better rate.    We don’t quite have that, but if we pushed, we could have it in 6 months, I think.   And then we’d have no cushion if anything bad happened in our lives.

The next thing is that we’ll need a reserve that covers all of our expenses–personal and investment–for 6 months.  That can be home equity, savings, cash, or retirement accounts.  We’ve got this one covered.

We don’t qualify for a standard mortgage plan right now, but there are options:

  1. Live poor and save hard for a year.  We could make it happen in 6 months, but I will still want an emergency cushion just in case a job or tenant go away.
  2. Buy as an owner occupant.  This would mean we buy a new house, then move into it and rent out our current house.  We’d have to stay there a year before we’d be allowed to rent out the new property.
  3. Compare mortgages online.   The internet is a wonderful thing, full of the complete knowledge of the human race.  There is no better way to try to find an affordable mortgage than hopping on the net.  Just make sure you’re looking at a reputable site and dealing with a legit mortgage company.
  4. Live comfortably and save slower, then buy the property in 2 or 3 years.

Honestly, of all of the options, we’re probably going to do a combination of 3 and 5, but 2 is a serious consideration, since we’ve talked about moving out of the suburbs a bit anyway.

Did I miss anything?  How would you fund a rental property?

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Buying a Fixer Upper House

English: Fixer Upper in Dorena

English: Fixer Upper in Dorena (Photo credit: Wikipedia)

Have you ever thought about buying a fixer upper house? In recent years there have been some great options for people looking to purchase property for the sole purpose of renovating and flipping real estate. There are some great locations with pretty nice houses that have either been damaged or neglected and are now for sale. These circumstances make it difficult for someone to purchase and remodel the house without spending a lot of money. In recent years there have been a couple of options for people who want to buy run down houses to flip. Mortgage companies have come out with different mortgage options for anyone who is looking to invest in real estate. There are loans tailored to meet whatever goal you have when purchasing a house that even allocate funds for renovation. The two that we will discuss in this post are Home Path and FHA 203 (k) renovation loans.

HomePath Loan:

The HomePath loan program was created by Fannie Mae and is meant to offer foreclosed homes to anyone who qualifies to purchase them. This type of loan is great because not only do you qualify for a loan to buy the house but also receive enough for renovations and remodeling. This pushes buyers to purchase homes that have been foreclosed and thus contributing to the real estate market and the economy as a whole. It’s also great for the buyer because it give them incentive to purchase a space that they might not go for right off the bat. Everybody wins.

FHA 203 (k) Renovation Loans:

203K loans allocate funds for the initial purchase of the house along with funds for the renovations. Companies offer low down payments and flexible underwriting guidelines. Almost any kind of residential property qualifies making it really easy to get approved. Many people don’t know that this kind of loan exists but it is definitely something that is not only beneficial to those taking out the loan but also to those looking to get rid of a place that won’t sell on its own because it isn’t visually or aesthetically appealing.

If you are on the market looking for a home, consider taking out a HomePath or 203k loan designed for houses that might need some fine tuning to look their best. It is a great option for anyone looking to flip property and for anyone who wants to purchase a space that might not be appealing upon first glance. Fixing up a place will not only increase the value of your new home but also probably cost a lot less than if you were to purchase a newly remodeled space for market value.

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