A rental property is a building purchased and leased out to generate revenue from rent. It is a great investment and a good way to increase your monthly income. Rental properties can be owner-occupied or non-owner-occupied. For owner-occupied properties, the owner would either live in the property or have a family member live there. Vacation homes fall under this category. With non-owner-occupied properties, the owner does not live on the property. The financing options for rental properties will depend on the number of units in the building and whether you will be residing in the building. A rental-purchase requires more management than your primary residence. Before you make a rental purchase, here is what you need to know.
Types of Rental Purchases
If you are looking to buy a rental property, you can choose between a single-unit property and a multi-unit property.
- Single-Unit Rental Properties include single-family homes, condominiums, and townhouses. These units are often lower priced and require less maintenance than other rental properties.
- Multi-Unit Rental Properties include buildings with multiple units. These properties could be used for retail spaces, offices, and warehouses and have the potential to generate more income as they can accommodate more tenants. However, they tend to require more maintenance. Properties with more than 4 units are considered commercial real estate.
Financing Rental Purchases
Rental purchases require a larger down payment and have stricter qualification requirements than primary residences. The down payment for non-owner-occupied rental properties is 20% of the property price. Lenders also require a higher credit score and larger income. Rental properties can be financed under a joint venture, where multiple parties combine their resources to purchase a rental property with an agreement to split the profits and the losses.
Advantages of Purchasing a Rental Property
Rental properties provide extra monthly income and have associated tax benefits like expenses that can be deducted from gross rental income. These include mortgage interest, property taxes, insurance, maintenance costs, property management fees and utility bills. As the value of the property increases, refinancing options can allow for other investments with the proceeds of the property equity.
Risks of Purchasing a Rental Property
While the benefits of purchasing a rental property are attractive, there are risks associated with taking up this kind of investment. Rental income is dependent on a landlord’s ability to find good tenants who pay rent on time. The landlord is still responsible for the property costs, even if a building is unoccupied, or the tenants refuse to pay rent. There is also the challenge of unexpected repair and maintenance costs which could eat into profits.
Regardless of the associated risks, a rental purchase is a sound investment that can increase income and build a property portfolio. At Source Mortgage, we offer competitive rates and comprehensive mortgage products to help you achieve your goals as smoothly as possible. If you are considering purchasing a rental property, talk to a specialist Source Mortgage today to get started!