If you’re still renting, you might think that you’re not paying a mortgage. Technically that may be correct but in the end the mortgage on your rental unit is ultimately being paid for by you. When real estate investors evaluate a potential purchase, one of the first things they’ll be looking for is whether or not the unit cash flows. Investors typically won’t buy a rental unit if it looks like the transaction will result in an additional monthly expense. Instead, the rent from the unit should more than cover the mortgage payment on the property, including property taxes, insurance and maintenance. If not, the investor will move on to the next possible purchase.
How does a real estate investor know if a deal will work or not? Primarily by doing some research on similar rental units in the area. It’s easier to come to a conclusion if there are multiple rental units in the area and less so if the home is essentially an isolated rental. For renters, they typically can pay around one-third of their gross monthly income for housing. That’s also the percentage that lenders use when determining affordability when someone applies for a new loan or wants to get preapproved.
For renters who are just starting to explore the option of owning instead of renting, they might soon come to the conclusion that it can be a very intimidating process. Getting a mortgage means paperwork, documentation, paycheck stubs, and income tax returns just to name a few. And that’s understandable. That’s where I can help by reviewing this process with you on the phone or in person. Anything unfamiliar can be intimidating at first glance. Many discover the process relatively easy when it’s time to sell the first home and buy the next one.
The same scenario can apply to real estate investors. For the first investor purchase, there’s also a lot of paperwork involved. In addition, once the investor has owned and managed a rental unit for at least two years, it’s much easier to get approved for a subsequent purchase. How? With a first rental unit, lenders won’t count the rental income from the property in order to help qualify. The income is there, it just won’t be counted as income. But after two years of ownership, lenders will in fact use the income from the tenants to help qualify. Most often the income generated is more than enough to cover the ownership costs including the mortgage, taxes and insurance. When this is the case, the income essentially erases the costs of owning. The income is the rent from the unit.
This is how a renter pays for someone else’s mortgage. It may not seem like that but in effect that’s certainly the case. Ultimately though most renters end up buying their first property at some point in the future. Those new owners could also buy their first rental property and become a landlord as well.
Many times, renters begin thinking about buying when their lease is soon to expire. And as market rents continue to rise, they start to think about it even more. In some areas, renting is actually more expensive than owning, especially so as we’re still in a very attractive mortgage interest rate market. It’s the lower mortgage rates that can offset higher rents.
When first exploring the option of buying, you’ll want to have a conversation about how much you can comfortably qualify for along with how much down payment may be required along with associated closing costs. With this total cost estimate, you can begin the path of saving. Even still, there are many low down payment options as well as ways to reduce how much in closing costs you can expect to pay. As you arrive at this stage, you’re getting closer to owning instead of renting. You’ll then also still be paying a mortgage, only this time it belongs to you and you’re an owner, not a renter.