Purchasing a Rental Property
So, you are looking to purchase a rental property!
Congratulations! This is an incredible opportunity, and we are here to help provide you with the keys to success to expand your financial portfolio and ensure stability for the future.
Before you launch into this purchase there are a few things you should know, such as how to purchase a rental or secondary property by tapping into existing home equity, there are differences in requirements for vacation vs. rental or investment properties and who can qualify.
If you are purchasing a rental property – whether a vacation home or investment property – there are a few differences if the intention is to rent. Before you look at purchasing a rental property, there are a few things to consider:
Often the minimum down payment required is 20% of the purchase price, and the funds must come from your own savings; you cannot use a gift from someone else.
Only a portion of the rental income can be used to qualify for and to determine how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the income added to yours, while other lenders may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford. Rental income from the property can be used to debt service the mortgage application but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property.
Interest rates will usually have an added premium on them when the mortgage is for a rental property versus a mortgage for a home someone intends on living in.
Along with the added monthly cash flow, rental properties have an added benefit of being able to write-off interest on ANY money used for the rental, even if it is pulled from your primary home’s equity. Also, if you do eventually want to sell this property, do note that it will be subject to capital gains tax. Your accountant will be able to help you determine potential write-offs and required tax payments if you do decide to sell in the future.