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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