Can You Afford An Investment Property?

When lenders crunch numbers on qualifying borrowers for a mortgage loan for an investment property, they consider 75% of the property’s rental income. The 25% vacancy factor is for unforeseen costs like changeover with renters, new appliances, maintenance, and more. If the rental amount received monthly does not cover the mortgage payment, the negative amount is offset by reducing the borrower’s income.

Example:

Mortgage payment including property taxes and homeowner’s insurance-$2,500

Rental amount received monthly: $2,800

$2,800 x 25%=$700. $2,800 - $700-$2,100

$2,100 is the amount the lender will use to qualify the property and borrower.

$2,500 full Principal, Interest, Taxes, and Insurance (PITI) - $2,100 (rental income)=$400

$400 reduction to borrowers income

Buying investment property can be daunting and frustrating as the lender’s qualifications can feel strict and uncompromising. However, they are taking the majority of the risk to lend on the property most borrowers would risk losing if push comes to shove. They will keep and maintain their owner-occupied home and forfeit an investment first.

Property Management Companies take a commission to maintain rent collection, credit inquiries, and accounts receivable and payable. Read the reviews, ask around and comparison shop to find out the range of fees for their services in the location you’re purchasing.

Pairing up with a partner, friend, colleague, family member to mitigate the risk is an option. Set out a plan in advance and stick to it in writing. It helps all parties involved in case things go sideways or a disagreement arises. Have a trust for each of you to delegate the portion you each hold and maintain and where you want your portion to go if one of you becomes sick or incapacitated or passes away. Set it up ahead of time to avoid pitfalls after the fact.

Talk to a licensed professional and ask for feedback and data before jumping in. There are thousands of real estate agents and mortgage consultants. Find one that you feel comfortable asking all the nitty, gritty questions and that you feel comfortable with. It’s important.