Financing Options for Rental Property

Many investors are now finding that rental property can be an excellent way to create wealth. If you are considering getting involved in rental property investing, it is a good idea to educate yourself as much as possible. First, you need to find out what it takes to become qualified to purchase investment property because it is actually somewhat different than becoming qualified to purchase a regular home.
One of the reasons for this is the fact that a significant number of investors either walked away from properties or declared bankruptcy during the early 1990s. While you should certainly not be punished for someone else’s problems, neither do lenders want to be left holding investment properties. Therefore, it is important to understand that the requirements for being approved for a mortgage on rental properties are somewhat different from what you may be accustomed to.
While a home can often be purchased with a minimum down payment, especially if you are a first-time home buyer this is often not the case with rental property. Many lenders require a minimum down payment of 15%.
There are many different sources you can tap into for possible financing. These options include:

·           Mortgage broker

·           Local savings and loan or bank

·           Private lender

·           FHA; Federal Housing Association

Regardless of which option you choose, you will find that most lenders will want to be assured that you will have a sufficient amount of rental income in order to cover not only the mortgage payment but also other expenses such as insurance, taxes and maintenance. Depending on the amount of income that will be provided from the property, some lenders may require a larger down payment.

There are also different types of loans which you can use to finance the purchase of a rental property. One option would be a residential loan. This type of loan can be used to purchase from one to four units. The exact options that are open to you often depend on whether the property will be owner occupied.

Another option would be a commercial loan. This is an option when the property is five units or more or it will be non-owner occupied. Due to the fact that it is a commercial loan, it is often far different from a residential loan in regards to terms and requirements. One of the main differences between a commercial loan and a residential loan is the fact that fees and rates are frequently higher on a commercial loan. A larger down payment is also often required. The down payment on a commercial loan typically runs between 25% and 35%. While there are some lenders who may be willing to agree to a higher loan to value ratio; the requirements for qualifying for such loans are usually more stringent. The lender will also carefully examine the ability of the property to generate a cash flow that will allow you to repay your loan. As a result, the lender will typically examine the property to ensure it can provide an income that will not only allow you to cover the mortgage payments and other expenses but also provide enough of a cash flow that you will have additional income to place into a reserve account.

Private party lending is another option for many prospective investors. One option would be to approach the current owner about seller financing. With this option the owner carries back the loan for a down payment and fair interest rate. You may find that you can save lending fees with the options and may also be able to take advantage of making a smaller down payment.

Another option would be what is known as a hard-money loan. This is a type of short-term financing where a third-party makes a loan to assist the investor with purchasing the property. Generally, this type of loan involves a higher interest rate due to the fact that the buyer has poor credit or because the property is in disrepair and requires extensive renovation.

FHA programs are frequently offered through traditional lenders. Keep in mind; however, that FHS does not actually lend money. They do provide insurance for lenders; offering numerous loan programs.

Regardless of which financing tool you choose, remember that there is always the option to refinance at some later point in order to obtain a better rate and terms. 

Guide to Tax Deductible Expenses

 

If you own rental property, it is important to make sure that you understand possible deductions in order to improve your profit margin as much as possible. As the owner of rental property, it is always a good idea to consult a tax attorney or tax consultant in order to ensure that you have a good understanding of the items which may be potentially tax deductible. Below is a guide to some of the most common items which are frequently tax deductible for owners of rental property.
One of the most important things which must be understood when you are determining what you may be able to deduct is the difference between improvements and repairs. Many owners of rental property commonly make the mistake of believing that anything they do to their rental property is tax deductible. This is not always the case; however. A repair is essentially anything that you do to the property in order to keep it in good condition. As such, it is often tax deductible for the year in which the repair is paid for. Common examples of repairs would include repairing a broken toilet, painting, replacing faulty light fixtures, etc.
An improvement; however, is something that you do to the property in order to add value to it. As such, it is not usually tax deductible at the time when you pay for them. That said; however, you may be able to recoup the cost of improvements by depreciating the cost over the life expectancy of your property. Common examples of improvements would include adding a garage to the property, a new roof, etc.
Mortgage expenses are often one of the biggest and most common tax deductions you can take when you own rental property. Of course, this is only an option if you have a mortgage on the property. It should be noted that any expenses which you incur in order to obtain the mortgage are not actually deductible at the time you pay for them. Common examples would include appraisals and commissions. Once you begin actually making the mortgage payments; however, you will typically be able to deduct the portion of the payment that is paid toward interest. It is always a good idea to keep very good records; however, you should receive a Form 1098 from your mortgage company that will detail how much you have actually paid in interest for that year.
In some cases, you may incur travel expenses in relation to caring for your rental property. Keep in mind that travel expenses are typically only deductible if they are incurred in order to either maintain your rental property or to collect rent. In the event you had to travel to make improvements to the property, these expenses are not deductible immediately. Instead; however, you may be able to recover the cost as part of depreciating the improvements.
It is important to keep in mind that you usually have two options when it comes to how you can deduct travel expenses. You may choose to deduct the actual expenses or you may choose to take the standard mileage rate.
There are also many other expenses which you may be able to deduct on your taxes. These expenses may include insurance, lawn care, taxes, tax return preparation fees and any losses which result from casualties such as earthquakes, floods, thefts, hurricanes, etc.
If the rental property which you own is a condo or a cooperative, there may be some special rules which will apply. For example, with a condo you may pay assessments or dues which are intended to provide for the care of property which is commonly owned. These areas would include recreational areas, elevators, lobbies and the actual building structure itself. When renting out a condo, you can typically deduct expenses such as repairs, taxes, interest and depreciation; however, you cannot usually deduct any expenses which were spent on improvements. These costs must be depreciated over the life expectancy of the property, just as it would be when you own a single family rental property.
With a cooperative, you may be able to deduct expenses such as maintenance fees. Capital improvements are a different matter; however. You would not typically be able to deduct the cost of improvements and you also would not be able to depreciate the cost. Instead, you would need to add the cost of those improvements to a cost basis in the stock of the corporation. If this situation applies to you, be sure to speak with a tax attorney or tax consultant.
Always make sure that you are prepared to back-up any expenses which you deduct on your taxes. These expenses must be carefully documented and you will need to make sure you provide documentation, including receipts. 

What to Consider before Buying Investment Rental Property

Rental property can be an excellent way to bring in additional money as well as invest in an asset that is actually tangible; however, investing in rental property does involve more than just purchasing a property and watching the money roll in. Many people believe that the biggest hurdle they may face is obtaining the loan; however, this may be easier than they actually think. It is other issues which you may face along the way which should be considered before you actually take the step of purchasing rental property.

First, always make sure you take the time to know exactly what you can afford. Many people make the mistake of overlooking this step, assuming that the rent will cover the mortgage payments. If you are not sure of exactly what kind of rent you can get before you purchase a property, you could find yourself in financial trouble later on. You should always research rental properties in your local area to understand the going rates for similar properties. Check the newspaper for information on going rental rates. It is also a good idea to check with your local landlord’s association for rental rate information.

In addition, you need to take into consideration expenses which may come up along the way. Ideally, you should have a reserve fund established to tide you over in the event you experience emergency expenses or your property is vacant for a period of time. Before you commit to purchasing a property, make sure that you will be able to rent the property for at least an amount that will cover the mortgage as well as still have a sufficient amount left over to cover insurance premiums, maintenance costs, property taxes and income taxes.

In addition, you need to give some thought and consideration to the type of property that will best suit you. You can find rental properties in many different sizes as well as types. Each of these different types can pull in different rental rates as well as attract different types of renters. So, giving thought to the property that best suits you is really an important step which should not be overlooked.

For example, if you purchase a property that is near a college or university you are likely going to find that most, if not all, of your tenants are college students. While you may never have a vacancy, you may also find that you have a continual turnover, problems collecting rent and even possible damage to the property itself.

In addition, you should make sure you understand your responsibilities as a landlord. Keep in mind that your obligations are typically regulated by the state in which the property is located. Some states have very little regulation while other states are highly regulated. If you fail to follow state regulations you could find yourself in for quite a bit of financial as well as legal trouble. It is always best to educate yourself ahead of time.

Finally, make sure you consider how much insurance you will need to not only property the property in the event of damage or destruction but also to cover all liabilities as well. One liability claim can be enough to cause serious repercussions so this is not an issue where you want to take a short-cut. Remember that it is your responsibility as the landlord to provide liability insurance, not your tenant. If someone should slip and fall on your rental property then it will be you who is responsible, not the renter.

Rental investment property truly can be an excellent investment and income builder provided that you are prepared and understand what you should expect from the outset. Do not be afraid to seek help where you need it, especially from associations and from professionals such as attorneys. This is the hallmark that can often set a successful rental property investor apart from one who fails.