Financing an Investment Property May 12, 2008
Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in. For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender. Here are some quick tips to help get you started if you’re considering buying an investment property.
Plan on using at least 20% for your down payment plus closing costs. With a 25 or 30% down payment, you will receive a slightly better interest rate. Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:
Owner Occupied with minimum 20% down: 5.75% priced with 1% origination/discount point (APR 5.904%)
Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)
NOO with 25% down: 6.250% with 1% point (APR 6.413%)
NOO with 30% down: 6.125% with 1% point (APR 6.289%)
Of course, you can always pay more in points to have a lower rate. This is just to provide you with an apples to apples comparison.
There are two camps for qualifying for an investment property: those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history. If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase. Lenders allow 75% of the rent to be used for qualifying purposes. Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s. If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal. Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing. Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers.
Odds and Ends
- FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home. The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction. You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
- Second homes are sometimes treated as investment properties. This is really up to the underwriter. Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
- Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).
As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).
How difficult is it to find a good rental in Seattle? January 6, 2008
I have a few “Google alerts” set up to be notified when certain terms are published on the web, such as Rhonda Porter, Mortgage Porter and West Seattle. Tonight, the West Seattle Google alert pointed me to someone who is looking to rent a 2 bedroom home with “a soul” for up to $2800.
We are moving to Seattle very soon. Need online resources to find a nice rental home for the two of us. We are looking in the Ballard, Queen Anne, and West Seattle areas. I’d prefer non-mega corporate rentals, ie. one or two unit townhomes, a house, or a smallish apartment building. I’m familiar with craigslist, which I’ve been using a lot. Also familiar with NWapartments. The larger sites like rent.com list rentals that are just too cookie cutter and commercial for us. Please give resources to help us find a nice, unique, home with a soul. BTW, we are looking at the $1800-$2800/month rent range for a 2bedroom.
Are rents that high? Do rental homes really lack soul? I rented my two bedroom in West Hill Auburn on Northlake a short time for $1800 per month a couple years ago that had “the soul” of worn out shoes. I loved that funky house. However, it was not a “good rental” for many reasons (1/3 acre garden, septic tank, etc), I clung onto it for personal reasons and have since sold it.
I’m just full of questions after reading this! :) Guess you could call it soul searching.
Don’t let your “gut check” go to waste… August 30, 2007
No, I’m not talking about a new abdominal workout but rather advocating that landlords be on top of things when choosing who to rent to. I bring up the topic to highlight that the majority of landlords don’t do this kind of research using instead a “gut check” to determine if someone is lease-worthy; they can end up hurting themselves or others if they aren’t doing the due diligence to know who they are renting to. It’s also on my mind as we had dinner last night with a client (a couple) who was regaling us with stories of him having to out upwards of 3 felons from a property over the past 2 years. Each of these tenants had been renting in the building prior to them buying it so they hadn’t had the opportunity to do a background check of their own and when you buy a property with outstanding leases you can’t require the tenants to undergo a background check - you just get what is handed to you.
In fact, Washington has just recently passed an offender re-entry housing law under HB 6157 that will impact landlord’s liability for renting property to past offenders.
Sections of this bill show the potential of liability being removed from the landlord BUT ONLY IF the landlord follows certain procedures. The full details are in the RHA newsletter publication dated in August 2007, Vol XXI, No. 8, Section A but I’ll paraphrase here by saying that basically you have to disclose to residents in your building that you have a policy of renting to offenders and that you must take steps to report or halt any criminal activity you have knowledge of on your property premises. You can contact Alice Bartley of RHA (publications@rha-ps.com) to see if she has extra copies of this newsletter available.
One way you can opt out of some of this potential for liability is to have a “no felony” policy as part of your rental screening process. There are several ways that you can screen prospective tenants and one of them is to do a background check for criminal history. In the Puget Sound area you can sign up as a member of Rental Housing Association of Puget Sound (www.RHA-PS.com) and get access to their tenant screening services which can include background as well as credit checks. You can also check for sex offenders online at this website. Even if you don’t sign up for RHA, it’s worth your time and money to do some research, but I HIGHLY recommend people get involved in organizations like RHA because they keep you informed and they also lobby regularly on behalf of landlord rights.
In Wichita, KS you can go online to this website for the KASPER search they have available. (KASPER stands for Kansas Adult Supervised Population Electronic Repository.) Apparently it is the “friendly ghost” for landlords and perhaps anyone meeting and dating online. 
I found the boyfriend of one of my KS tenants on this website - she’s been letting him stay at my property (this started prior to my purchase of the building) but they are moving out as of the end of this month. Good. And Goodbye.
If you are a person looking to buy rental property I would recommend that you ask the seller if they have ALL the records for the tenant screening processes that they’ve used in the past to provide during your inspection process and not just the lease records. You will want to know if there are known felons living on the premises especially if you’ll be responsible for possible liabilities due to a tenant’s bad behavior and a new owner must meet the terms of a lease agreement if it is still in place when buying a property.
Another area where I wonder how it will play out over time is that in residential units (1-4 in WA) the State’s required Seller Disclosure Form has a notice stating that sellers need not disclose if there are sex offenders living near their home. If the home is used as rental property, and a known sex offender is renting at the property, will the seller need to disclose it?
Recall notice on some GE Dishwashers August 29, 2007
I got a notice the other day, and I’ve had a client receive one before too, asking me to check the model and serial number on my dishwasher to see if it might be one of those that has had problems.
“What is the problem they are concerned with”, you ask? Well, it seems that some liquid rinse-aid products build up a residue on the wires inside the door which can degrade the insulation of the wiring. This in turn has caused electrical shorts and fires in some of their products.
My client’s dishwasher ended up not being one of those on the recall list. However, mine was. The good news for me is that I don’t use any rinse-aid products so the recall won’t necessarily apply to me. It does put me on notice that I shouldn’t use the rinse-aid in the future though.
I’m wondering how people are supposed to notify purchasers of their homes about product recalls like this when they sell? Would it possibly be required on a disclosure form even if the specific dishwasher in your house never had a rinse-aid used in it? The notice from GE says that if you’re the owner of one of these dishwashers and you cannot attest to whether or not the former owner used rinse-aids, then you should repair or replace the dishwasher.
Anyone else have comments on how they would do it? For my own home, I’m thinking about taping a copy of the notice inside the cabinet under my kitchen sink and making a note that I don’t use rinse-aids and then perhaps keeping a copy with all of my other appliance manuals.
If you’ve got rentals with dishwashers you should be sure to check them as well as your own home’s dishwasher.
Pickiness imperative in roommate search May 23, 2007
(Chicago-to-Seattle)
Great place in Seattle quells stress of long distance move
With Seattle’s burgeoning condo market and increasing rental rates, pangs of discouragement hit me after I finalized my decision to move to Seattle. Affordability was going to play a prime role in whether I could transfer, and reports of surging prices squeezing out single women from becoming condo owners only left me further disillusioned. You can easily argue that Chicago is still more expensive, but being from the burbs, I have not resided directly downtown.
After scouring apartments and worming my way through Seattle searching for a comfy place to call home, I quickly realized I would have to pay in excess of $1,000/month for a 1 bedroom apartment (that met my standards) downtown, unless I was wiling to settle for a somewhat dilapidated one. Another logical option was to live in my university’s apartments – which are nice, but still pricey – so I decided to scrap that route in favor of one downtown, but with a roommate. My free evenings were spent poring over the Craigslist.org roommate ads.
A few weeks later, I found a suitable roommate, who I’ll call Betty, and things seemed like they would mesh together swimmingly – Betty was subleasing a sumptuous Capitol Hill condo with her soon-to-depart roommate and was looking for her roomie’s replacement. But soon after we agreed on lease terms as roommates, her place became unavailable. Unfortunately, Betty’s roommate managed to extend the lease a couple months, totally disregarding their agreement and her roommate’s efforts to find her replacement.
My heart sank after our plans unraveled and I vowed to be more scrupulous in my search, less trusting and make sure the room’s availablity was not dependent on another person moving out or a landlord. I turned to the slick site, roommates.com, which is much more accessible and informative, in that it provides thumbnail pictures, maps and bios on all its listings. Moreover, the ads seemed geared toward working professionals, a big perk for those not interested in standard college apartments often typecast as grimy.
Thankfully, via the site, I found a great match whose interests and personality jibes with mine. Since my roommate is the owner of the townhouse and to curtail any unforeseen problems, we churned out our own agreement, which eases my mind since I have a cross-country move awaiting me. And even though my new home is not smack in the epicenter of downtown, I appreciate that my rent will chip away at my roommate’s mortgage, instead of going to a random landlord.
Being capricious and putting too much stake in a place that appeared plush was my biggest downfall in my initial search to find a roommate, and I don’t think my situation is an aberration. If you are fastidious about your research in your roommate search, it will pay off. Plan on chatting extensively with your potential roommate to gauge your compatibility, Googling the person or asking for references and make sure you don’t cling to one specific person (like I did) until all the facts check out. And if even a remote possibility exists that your room/roommate might fall through, simply move on.
