Buying A Home
ljanette85
member
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buying income property...
hello, i normally post on TB but I have some house buying questions...
my FI and I are going to start house hunting this winter. I am very interested in purchasing a two family home or a home with a small in-law apartment attached. My sister did this and they have had a great experience, their tenant pays a large portion of the mortgage. I feel like this would be a good move for us, we have a LO and it would be ideal for us to have the extra income. Of course we would purchase a place that we could afford with or without a tenant.
does anyone have any tips for purchasing an income property that we would plan to live in for a while?
TIA!
Re: buying income property...
I would wait until you are married to do this as that would offer you more legal protection.
SAVE, SAVE, SAVE! for a LARGE downpay,ent (since interest rates are higher for income properties) AND you want a well funded emergency fund - you will need it with a rental for both repairs, maintenance and for times when you do not have a tenant or a non-paying tenant.
Become informed as to rights and responsibilities of both landlords and tenants. Be prepared to experience a bad tenant and have a plan for how you will handle them. Know the building codes you will need to have in place, inspections, lincenses as well as your tax inplications. States vary on how you need to excrow the security deposits etc. Do financial checks on rental applicants, proof of employment and FICO scores.
How do you feel about living so close to your tenant and sharing backyard and laundry space?
My husband and I are doing this too but it's to build equity, not have the tenant pay most of the mortgage. MFHs in our area are fairly expensive and we would actually be paying more for our unit than the market rent. We have been looking for over a year, but are hoping to go into escrow next week. We've learned a lot in the past year so here's my advice.
Check your credit. You definitely want to be above 750.
Start estimating the Principle, Tax, & Interest for properties you are interested in by using calculator below. Use 0 for PMI if you put 20% down. 1.25% for property taxes is pretty standard but check out your area and use the real value. Some mortgage calculators do not consider property taxes which is ridiculous because it could mean the difference of $1,000 a month.
http://www.mortgagecalculator.org/
Start shopping loans. You will need at least 20% down. We found one lender (Prime Lending) whose rates did not change very much from a duplex to four-plex. However, we found that Schools First had some rediculous rate and the term was 15 years if the units were not attached. Some lenders will offer credits if you use their agents. Just something to consider if you are not tied to one. Side note, factor in that your closing costs could be between 10k-20k so you'll need 20% plus about 20k to make sure your covered.
Lenders will allow you to borrow more than you are probably comfortable with. Our loan guy nearly laughed when he saw what my husband and I wanted to be approved for and what our income and savings are. If I lost my job or wanted to stay home with our future children then we might be in a lame situation. We're just financially conservative and we want to maintain a stress free lifestyle. I recommend getting something you can support on one income.
Your pre-approval will expire in 3mo. Try not to get pre-approved until you are ready to make an offer. Our pre-approval expired waiting for a counter offer on one property. We're up to 3 pre-approvals now and my credit has taken a 20 point hit which makes me pretty mad because I was over 800.
Save 6mo rent to make sure you can handle the rent in between tenants and repair costs.
I recommend buying in neighborhood with a good school district. You'll probably find better tenants in people who are concerned about their children's' education. I do not recommend buying near a college if you will have a 1-2 bedroom to rent out. You might end up only finding college kids to rent to and I definitely wouldn't want to deal with a college kid.
Slab on Grade vs Raised Elevation. Try to buy something with a raised elevation. This will help reduce repair costs to pipes. My contracter highly discourages buying a slab on grade property.
OK, I think that's all my tips. Happy house hunting!