Use Real Estate To Create Retirement Income
Real estate is a popular way for individuals to generate retirement income. In fact, its Americans favorite long-term investment, according to a 2021 Bankrate study.
That popularity partially relies on real estate producing a steady stream of income, as investors collect a regular monthly rent from their tenants. For retirees, a steady income is exactly the kind of security that theyre looking for when not fully employed.
And retirees have upside on that income. Over time, a well-managed property can increase its rents, putting more money into investors pockets each month. The property can also increase in value, so when it comes time to sell or even invest in another property, theres equity that can be tapped. Of course, investment property has other advantages, especially around taxes.
If you dont want to get into managing property directly, you can buy it via real estate investment trusts in the stock market and let a professional manager deal with all the problems. REITs are tremendously popular with retirees because of their steady dividends.
Should You Hire A Property Management Company
You need to decide whether you want to handle property repairs, tenant management and maintenance yourself or if youll hire a property management company to manage the daily maintenance on your behalf.
Property management companies take both scheduled and emergency repair calls and check up on your property with both drive-bys and scheduled visits to make sure that tenants respect your space. They can also collect rent on your behalf. Some property management companies also offer tenant placement services and eviction processing for an additional fee. In exchange, the property management company takes a percentage of your monthly rent. If you live far away from your property or you dont have the home repair skills to fix your own property, hiring a property management company may be a great choice.
Gather The Proper Documents
Your lender will ask you for a few documents to begin the refinancing process, including:
- Proof of income: Youll usually have to show the lender your original pay stubs from the last 30 days. Your lender may ask for a bank statement or another form of income validation if youre self-employed.
- Copies of your W-2 or 1099 forms: Lenders require your W-2s or 1099 forms because they use them to verify your employment history and your income. Your lender may also ask to see your full tax return if youre self-employed, and will require this information from everyone you include on the loan.
- Proof of homeowners insurance: This shows the lender that you have enough coverage on the property to protect your investment.
- Copy of your title insurance: Your title insurance helps your lender verify that the property is yours to refinance. It also provides the lender with a legal description of the property and information on taxes.
- Copies of your asset information: Your lender will want to see your assets, including bank statements, investment account information and retirement savings.
Gather the proper documentation before you apply for refinancing to help speed up the process. Keep more than one copy available in case you need to resend any documents.
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Are You Ready To Be An Investor
Property investment can be both risky and rewarding. Rental income and capital gains are never guaranteed. Before taking the plunge, here are some of the potential risks and benefits you should think about.
Benefits
- Rental income. You may earn a rental income that puts cash in your pocket right away some investors may enjoy returns of $50, $100 or more every week, over and above the costs of owning the property. You can invest this money into the mortgage to pay the loan off sooner, or use these funds to supplement your own income.
- Capital gain. Many investors buy property with an eye on the long-term gains, so they’re aiming for future price appreciation. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen. You could potentially grow wealth far more effectively with property than through savings alone.
- Tax and depreciation benefits. You can deduct investment loan interest charges and other investment costs from your income tax each month, making the cost of owning a property far more affordable.
- The potential to add value. Unlike shares or other investments, you may be able to manufacture equity or price appreciation in your property asset by adding value through renovations.
Risks
Common Investment Property Myths
Before examining the benefits of buying investment property, lets bust two persistent myths.
Investment Property Myth #1: Buying a primary residence is the same as purchasing an investment property.
Reality: Although many people think of their homes as investments, a home is not an investment property unless you buy it for the express purpose of generating rental income or a profit upon resale.
Investment Property Myth #2: Home values have always risen, so a primary residence will end up being an investment property if you own it long enough.
Reality: Adjusted for inflation and local market conditions, home values have not always risen. Nationally and locally, housing prices are subject to boom-and-bust cycles. Regardless of how long you own a property, theres no guarantee youll make a profit when you resell it.
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Look At Apr As Well As Mortgage Rates
Its important to look at annual percentage rate as well as current mortgage rates.
So while an FHA loan might appear to have lower rates than a conventional loan, for example, it could have a higher APR and therefore be more expensive overall.
Jumbo mortgages are a bit of a special case. Jumbo loan rates can be near or even below conventional loans. But these mortgages are significantly tougher to qualify for.
Ask For Owner Financing
In the days when almost anyone could qualify for a bank loan, a request for owner financing used to make sellers suspicious of potential buyers. But now its more acceptable because credit has tightened and standards for borrowers have increased.
However, you should have a game plan if you decide to go this route.
You have to say, I would like to do owner financing with this amount of money and these terms, Huettner says. You have to sell the seller on owner financing, and on you.
This game plan shows the seller that youre serious about the transaction and that youre ready to make a real deal based on the practical assumptions that youve presented.
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Other Details To Consider When Comparing Investment Property Mortgage Rates
Interest rates and fees are important when evaluating how to finance a rental property, but there are other important issues to consider.
5 Things to Know about Agency Loans
1. Self-employed beware. To qualify, youll likely need strong, consistent personal income from a third-party employer. These loans are difficult to obtain if you own your own business.
2. Liquid cash reserves. You will need substantial liquid reserves and the required reserves will go up as you grow your rental portfolio.
3. Liability risk. You will have to hold title to your rental property in your personal name. This means you could be sued personally if someone is injured while at your rental property.
4. Documents galore. Your lender is going to go through your income, asset, and tax return documents with a fine-toothed comb. Be prepared for a laborious process.
5. Credit score impact. Agency Loans are reported on your credit report. This can limit your ability to access other types of credit.
5 Things to Know about Bank Loans
1. Low priority. Most community banks focus on making commercial real estate loans and small business loans. While some will make residential investment property loans, it is not their bread and butter. So dont expect a smooth process.
3. Deposits. A lot of banks wont make you a loan unless you have a deposit relationship with them. Be prepared for a bank to want you to keep some cash with them if you want a rental loan.
6 Things to Know about Non-QM Loans
How To Get A Low Interest Rate On An Investment Loan
Most banks and other mortgage lenders offer their lowest interest rates to the most secure borrowers. The lower the risk that youll default on your repayments, the lower the rates you may be offered.
Because investment loans are often considered riskier than owner-occupier home loans, borrowers may need to fulfil strict eligibility criteria to enjoy some of the lowest interest rates.
To help improve your investment loan applications chances of being approved, think about the following:
Remember that even if your investment loan doesn’t offer the best interest rate for you today, you may be able to refinance your investment mortgage down the track after your financial situation has changed, and select a loan that better suits your circumstances.
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What Is An Investment Property Loan
An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value.
Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.
How Much Higher Are Mortgage Rates For Investment Properties
Mortgage interest rates will always be higher on rental and investment properties than on your primary residence.
How much higher? Technically, the answer to that question depends on the type of investment property, your creditworthiness, and your down payment.
But as a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
As a rule of thumb, you can expect investment loan rates to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
For example, todays live 30-year fixed rate as of September 10, 2022 is % , so the investment property rate would be around % to % .
Lenders add this upcharge because they consider rental and investment property mortgages to be a riskier loan product.
Mortgage borrowers tend to bail on rental properties before theyd bail on their primary residence if the going gets tough. Thus, these types of home loans are more likely to default during hard economic times.
To protect themselves against the extra risk that comes with investment property financing, lenders charge a higher interest rate and have stricter qualification rules for borrowers.
That makes it extra important to shop around and make sure youre getting a fair mortgage rate on your investment property before you buy.
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Investment Property Rates Vs Primary Residence Rates
There is a difference between primary residence mortgage rates and investment mortgage rates. Although you will find investment property interest rates to be higher, theyre not always significantly higher. Investment property loans typically carry an additional 0.5% to a 1% surcharge on the interest rates.
Interest Rates On Investment Properties
A rough estimation is that borrowers can expect to pay between .5 and 1 percent higher interest rates for loans on investment or rental properties. Interest rates depend largely on the borrowers financial and credit situation however, youll generally pay more in interest for investment properties than you would for a home loan because lenders are assuming a slightly higher level of risk.
The thinking is that borrowers are more likely to default on loan payments for investment properties than their primary residences in tough economic times, which makes these types of loans riskier for lenders. They charge higher interest rates for that elevated risk, and borrowers must meet some strict qualifications in order to qualify, such as a larger minimum down payment.
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How To Get A Loan For A Rental Property
1. Make sure you are ready on your end cash down payment and credit worthy.
2. Find a property in an area that has good rental incomes vs purchase prices. Many investor areas support the 1% rule. The 1% rule says you should be getting 1% of the purchase price per month in rental income.
3. Find a lender, like HardMoneyMan.com LLC, that specializes in lending to investors .
4. Make sure you have all of the numbers needed to evaluate your deal purchase price, rental income based on 12 month market rents , yearly property taxes and the yearly property insurance.
5. Contact your lender to run the property debt service numbers , to find out how much debt this property can handle.
Current Non Owner Occupied Mortgage Rates
Review current non-owner occupied mortgage rates for September 10, 2022. The table below enables you to compare non owner occupied mortgage rates and closing costs in your area. There tends to be a wider variation in loan terms for investment property mortgages which makes shopping multiple lenders more important. Compare APRs, interest rates, monthly payments and closing costs for different lenders and loan programs.Adjust the inputs in the refine your search menu to compare updated non owner occupied mortgage rates based on your specific criteria including loan amount and program. We recommend that you contact at least five lenders to find the best non owner occupied loan terms including the lowest interest rate and costs.
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Where To Get Financing For Investment Properties
Financing an investment property can often be a challenge. Not only because of the stricter terms and conditions required to qualify for the mortgage, but also because rental financing may not always available from the buyer’s bank of choice.
Consequently, buyers often have to look at other lending avenues to secure the financing they need. The most common mortgage providers for rental properties include:
How Much Higher Are Mortgage Rates For Investment Property
Investment property mortgage rates are always higher than rates on primary residences . This is because financing agencies usually have a separate set of fees for primary residence and for investment properties. These fees are directly correlated with your mortgage rate. Usually, when getting investment loans, investors pay higher fees and, therefore, get higher rates. How much higher? Technically, it depends on the type of investment property, your credit-worthiness, and your down payment. However, the rule of thumb is that rental property mortgage rates are 0.5% to 0.75% higher than primary mortgage rates. So, at current rates mentioned above:
- 30-year investment property mortgage rates would range from 3.5% â 3.75% for single-family homes
- 15-year investment property mortgage rates would range from 3.11% â 3.36% for single-family homes
- 5-year adjustable-rate mortgage would range from 3.36% â 3.61% for single-family homes
Read this guide to learn all about the Best Real Estate Investment Loans in 2020.
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About These Rates: The lenders whose rates appear on this table are NerdWallets advertising partners. NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a lenders site. The terms advertised here are not offers and do not bind any lender. The rates shown here are retrieved via the Mortech rate engine and are subject to change. These rates do not include taxes, fees, and insurance. Your actual rate and loan terms will be determined by the partners assessment of your creditworthiness and other factors. Any potential savings figures are estimates based on the information provided by you and our advertising partners.
Trends and insights
Why Are Interest Rates Higher On Investment Or Rental Properties
Your interest rate will generally be higher on an investment property than on an owner-occupied home because the loan is riskier for the lender. Youre more likely to default on a loan for a home thats not your primary residence. Thats a good reason to use our investment property mortgage rate tool to compare prevailing interest rates that you qualify for.
In addition to paying higher investment property interest rates, its likely youll have to make a higher down payment. Conventional mortgages generally require at least 15% down on a one-unit investment property and 25% down on a two- to four-unit investment property. And loan terms are usually shorter than the typical 30-year residential mortgage. After all, its a business transaction, rather than a home purchase.
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Math Behind Rental And Investment Property Loan Rates
Behind the scenes, the rate your mortgage lender charges isnt totally up to the lender. Property lenders often adjust rates to meet rules set by Fannie Mae and Freddie Mac.
Fannie and Freddie set rules and fees for most mortgages today and the fees they charge directly affect the final interest rate you pay.
Because of the increased risk of purchasing or refinancing investment properties, Fannie Mae and Freddie Mac charge higher fees on those transactions. Their fees trickle down to you as a higher interest rate.
| Type of investment property | |
| 3.75% | 4.375%-4/75% |
*Rates shown here are an example set meant for comparison only. Your own rates will vary.
For instance, an investment property loan with a 20% down payment would require a fee equal to 3.375% of the loan amount.
This is the same as $3,375 for each $100,000 borrowed.
In most cases, the borrower chooses to pay a higher interest rate instead of extra dollars in closing costs. So, how do these fees translate to your final rate?
In this case, 3.375% in investment property loan fees can be covered by an extra 0.5% to 0.75% added to the rate.
Keep in mind this is for a single-family home. Buy a duplex and you might pay another 1.0% in fees, or 0.125% to 0.250% added to your rate.
To get the best rates, you will want to put at least 25% down. The ideal loan-to-value ratio for investment purchases is 75% or less, advises Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
