ARE RATES DIFFERENT FOR RENTAL PROPERTIES?
For a novice in the field of real estate, rental properties also called investment properties, refer to a property in which the owner collects payments known as rents from the occupiers. These occupants are essentially the users of such building. It could be commercial or residential. The mortgage rates on rental properties are usually higher when compared to those of traditionally residential properties. In this article, we will discuss what buying a rental property entails, the benefits of owning rental properties and why residential properties interest rates are lower than rental properties.
WHAT BUYING A RENTAL PROPERTY INVOLVES?
As already stated before, the mortgage rates on rental properties are way higher than traditional ones. However, this does not mean it can’t be profitable. Before you decide to get one, here are a few things to consider.
- You’d need to calculate the expected income. Try to seek the advice of rent experts or consultants in an area where you hope to buy a rental house.
- It would be best if you also calculated the total expenses you would incur from running the property in a year. These expenses include emergency cost and others.
- Consider if the building would be rented on at least a fairly regular basis. Knowledge of this would hint you on whether your annual expenses on maintenance would be adequately covered.
To buy a rental property, you might need to make a down payment of at least 20 or 25% depending on the type of property you choose to buy. All other possible requirements might be posed to you to meet before the purchase of the property. Be always prepared when proposing to buy a rental property.
BENEFITS AND RISKS OF RENTAL PROPERTIES
Rental home management comes with both benefits and challenges. The benefits associated with it include:
- It provides a direct income flow
- It allows you to benefit from a tax deduction in terms of property improvement and refurbish.
- It allows you to enjoy the growth in value of the rental property
The risks associated with this type of property include:
- It is not a liquid asset and cannot be easily converted to cash.
- It could take months to complete a property sale.
- There will be a loss if there is an increase in tax, and expenses on the property.
WHY MORTGAGE RATES OF RENTAL PROPERTIES ARE MORE THAN THOSE OF TRADITIONAL PROPERTIES
Several factors determine why the mortgage rates on a rental property are higher than those of traditional property. These include the amount of risk involved, the commitment required among other things; that will be explained further.
First, the qualifications or requirements for a traditional property are different from those of a rental property. For traditional properties, the income or salary of this applicant is a major decider in considering whether the mortgage application will be successful. This is because salaries represent a steady income and are less risky. For rental properties, on the other hand, the potential rent, as well as income, is considered. Moreover, since the potential rent payments may not occur as one hopes it provides a more significant risk to bankers, such that the mortgage rates for rental properties are higher to forestall losses. It is due to the potential volatility of rent payments, that the rental history of properties mortgaged also is essential in the banker’s consideration.
Also, there is the reality that when there is a decrease in financial fortunes, a buyer’s rental properties are the first to be defaulted in payments concerning the mortgage, before the traditional properties, as the buyer must live somewhere. This means that clients tend to default in rental properties than traditional properties as the former is more like a business and warrants less attachment than later.