Financing investment properties could be quite a headache if you’re not prepared. So read on to see what rental property mortgage rates you can expect.
Buying an investment property differs from buying a traditional property as a primary residence in many ways. One of those differences is the mortgage rates for each. When you buy a real estate property to live in, mortgage rates are expected to be fairly stable. However, when a real estate investor buys an investment property, they can expect fluctuating rental property mortgage rates. Usually, investment property financing involves slightly higher rental property mortgage rates. The best thing any real estate investor can do when they go down the path of financing rental properties is having enough cash reserves and a good credit score. Anything to keep the lender happy.
Related: What Are Your Options for Financing Rental Properties?
How To Prepare
- Be prepared to make a down payment: when it comes to getting a mortgage on your rental property, you need to be prepared to make at least a 20% down payment. Sometimes it can even reach a minimum of 25%.
- Search for investor-friendly lenders: look for a lender that actually understands the investing landscape so that you can be given the right advice and not have to waste time explaining your strategy and goals to a mortgage broker who doesn’t really understand real estate investing. You want reliable sources and to build a strong team to back you. Achieving a good relationship with your lender could go a long way in your real estate investing career.
- Know your credit requirements: know the different credit-qualification guidelines you need to follow for getting rental property loans.
- Prepare your cash reserves: cash reserves refer to the money which an individual person, company, or corporation saves in order to be ready to cover any emergencies. Lenders typically expect you to have six months of cash reserves available per property in order for you to qualify for a mortgage.
Related: How Do You Find the Best Rental Property Loans?
Rental Property Mortgage Rates
Before we break down rental property mortgage rates, let’s define what a mortgage actually is. In the simplest terms, it’s a loan taken out to buy a real estate property. There are two main types of mortgages: fixed-rate and adjustable rate. Fixed rate means that the interest rate of the mortgage remains the same (fixed) throughout the life of the loan. Adjustable rate means the opposite- interest rates can change. In adjustable-rate mortgages, initial interest rates are usually less than fixed-rates, which means that your initial mortgage payments will be lower.
Related: Rental Property Mortgage: The Ultimate Guide to Getting Approved
HOW DO RENTAL PROPERTY MORTGAGES DIFFER FROM TRADITIONAL MORTGAGES?
The requirements to qualify for a rental property mortgage are a bit more strict. We’re not saying that it’s impossible to get a mortgage on a rental property, but lenders tend to be more wary of giving loans to finance an investment property. They have different guidelines that need to be followed to ensure that you have enough money to make the mortgage payments. The banks refer to this as a ‘safety net’ just because of the risk that’s associated with rental income and tenants failing to make their rent on time.
Mortgage rates can vary from one lender to another so make sure you have a wide scope and speak to multiple lenders before deciding on one to go with. According to Money Under 30, there are multiple sets of guidelines regarding down payments, depending on how many loans you wish to take out/have:
- 1-4 Loans (single family): 20 percent down
- 5-10 (single family): 25 percent down
- 1-10 (multi-family): 25 percent down
As stated above, the type of rental property you’re buying can change the down payment that needs to be made. With each property type comes different rental expenses and a different amount of rental income. According to USA Today, a new study has been done in which single family homes have been found to generate a return on investment of 9% annually on average. This study examined results from 1986 to 2014 in the US real estate market. People have been so motivated to purchase rental property as a way of building their wealth because of this high return.
Of course, in today’s world, nothing comes without risk. Be prepared to handle risks ranging from troublesome tenants to changes in tax laws. But conducting a real estate market analysis, having the proper financing method, and managing your rental properties well can all lessen the damage of these risks.
Best Cities to Invest in Rental Properties
Every real estate investor looks for lower rental property mortgage rates so that the net cash flow resulting from their income properties can be positive. It makes sense to say, when managed properly, low rental property mortgage rates have a direct relationship with profitability.
So in which areas in the US can you find low rental property mortgage rates and high profitability? You’d probably expect the answer to be one of the more expensive cities, like Los Angeles. But that’s surprisingly not correct. According to the same study mentioned earlier, 30 big metro areas were studied and the following results were found:
#1. Miami- single family rental homes in Miami were at the top of the list with an average annual return of 12%
#2. Tampa, Houston, and Pittsburgh- these three tied for second place with a 10.2% annual return
#3. San Francisco, Minneapolis, & Nassau/Suffolk counties in New York- landing in the middle with an average annual return of 9.1%
#4. New York City & Boston- two of the priciest markets in the study tied in the last place at a return of 7.1%
Note: We talked more about returns and profitability than actual rental property mortgage rates. Different rates depending on the lender make it difficult to attach a specific rate for each area. We also focused primarily on single family homes because about 1/3 of renters in the US lease them instead of apartments.
Last Word on Rental Property Mortgage Rates
Rental property mortgage rates will always be higher than primary residence mortgage rates which is something most investors already know. What they might not know is how to achieve a profitability with the given rental property mortgage rates. They can conduct a comparative market analysis and utilize the many tools of Mashvisor to help build their investment property portfolio. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.