Buying a home is a significant financial commitment. Some people would rather save up first for a small business. But what if you can buy a house, live in it, and earn from it as a business, too? You can, if you buy a multi-unit residential property and live in one of the units. You can then rent out the three other units and earn from them to subsidize your monthly mortgage payments. This article will walk you through this option.
Rental Property Mortgage
If you apply for a mortgage for a residential rental property, you will meet more stringent conditions and higher rates than those for a property you will live in. These make investing in residential rental property unaffordable for many.
You need a credit score ranging from 620 to more than 740 and a debt-to-income ratio between 36% to 45%. You will also be asked to make a down payment ranging from 15% to 25%. Finally, you must show savings that cover three to six months of your monthly expenses plus the full amount of the mortgage including interest, insurance, and taxes.
You can get around this, though, if you purchase a multi-unit property with a maximum of four units and live in one unit. The Federal Housing Administration allows you to get an FHA home mortgage loan for this. For the FHA loan, a lower credit score and down payment can suffice.
If you are a veteran or an active military member, this will also qualify you for a Veteran Affairs (VA) home loan. If the property is in a rural area, this will qualify you for a U.S. Department of Agriculture (USDA) home loan.
What to Prepare for as a Landlord
Before you jump into it, though, you must first learn what you must prepare for as a landlord.
Be Prepared for Vacancies and Delayed Rent
There will be times when one unit or more will be vacant. Sometimes, tenants cannot pay rent on time. While you can charge a late fee for delayed payments, you still have to find enough funds to pay the mortgage on time.
Hence, you must not rely entirely on the rent you will receive to pay the monthly mortgage. Ensure that your other income is enough to cover this.
Be Prepared for the Cost of Taxes and Insurance
You must include the cost of taxes and landlord insurance when computing for rent. You must also be prepared to pay for these in full and on time even when you have late rent payments from tenants or vacant units.
Be Prepared For Maintenance and Repair Costs
You must include maintenance and repair costs when setting the rent. Remember, though, that this will come as an increment of the rent. You must be prepared with the cash to immediately see to repairs as needed.
You can minimize repairs by keeping the entire property well-maintained. You must set aside a budget for this. Talk to professionals to determine schedules for inspections and maintenance work.
Prepare a Tight Lease Agreement
Consult a lawyer when preparing your lease agreement to ensure that it is legally tight. It must also be clear and easy to understand. Include the amount of rent, when it is due, the charge for late payment, and the cut-off when you can issue a notice of eviction.
List down all the rules that tenants must adhere to and what else can be cause for eviction. Consult your lawyer on what your legal rights are, as well as the rights of tenants.
Be Prepared to Screen Tenants Properly
It is crucial to screen tenants to ensure that they can afford to pay the rent. You can hire a company to provide you with the tenant’s credit report, rental history, and criminal history.
However, your decision must be guided by the Fair Housing Act. That means you cannot turn away prospective tenants due to race, color, national origin, religion, disability, sex, gender preference, and family status. The last means you cannot discriminate against pregnant women and families with young children.
You also cannot discriminate against people with a criminal record in general. You can, however, indicate in your lease agreement a policy against specific criminal convictions that can endanger the other tenants’ safety and property. That includes crimes related to illegal substances.
When you deny an application based on information from a consumer report, the Federal Trade Commission requires you to send the applicant an adverse action notice. This must include the reason for denial, the name and contact information of the company that issued the report, and a disclosure that the applicant has the right to dispute it.
Assess Your Capability for This Opportunity and Responsibility
Being a landlord can be a lucrative business venture, but it also comes with its fair share of responsibilities. Before jumping into it, make sure you are prepared for the building mortgage, costs of taxes, insurance, maintenance, and repairs, as well as vacancies and delayed rent payments.
You must also be aware of your legal rights as a landlord and the rights of your tenants. By screening tenants properly and preparing a tight lease agreement, you can minimize problems down the road. Carefully consider all of these factors before deciding if buying a rental property and living in it is the right decision for you.
