As the next wave of investors decide they’re ready to make the move from residents to landlords, there is an opportunity for you to demonstrate your expertise in meeting the needs of this client niche. Many would benefit from a better understanding of how the shift changes their financing options and the underwriting process.
Why the Interest in Becoming a Landlord
There are many good reasons for a client to want to purchase a residential property to rent out. For a first time buyer, purchasing to rent is a way to make mortgage payments more affordable on a portion of their property, since the rental income can help offset the cost of a mortgage and create greater cash flow efficiency. The extra income from owning rental property can also offer protection against any future job interruptions. For older clients, buying a property to rent out can create a reliable income stream and potentially offer a higher return than a conservatively invested portfolio.
What clients may not realize is that financing investment real estate property can be different from financing an owner-occupied home. Helping educate them will make for an easier process.
What Clients Need to Know
Buyers new to real estate investing may assume that if they are purchasing a single-family home to fix up and rent out, obtaining financing will be similar to what is needed for an owner-occupied home. It is if they intend to live in the home for at least 12 months before renting it out. In this case, they have access to the full range of financing solutions you offer, including conventional loans with low down payments and 203k loans to offset the repair costs.
Clients intent on buying a property to rent as soon as they take ownership will need to understand that down payment requirements are different. Even though the goal is to generate rental income to offset the mortgage and costs of ownership, unless the property has renters in place already, the expected rental income will be discounted—if it can be included—when income ratios are calculated.
While being a landlord is a “business,” clients will still need to be able to qualify based on their personal credit records and their nonrental income. Often, this leads to looking at their current property holdings to see if a HELOC or cash-out refinancing will be a cheaper alternative for funding.
Vacation homes are generally lived in at least for part of the year, so they are often financeable in ways similarly to a residence. Diplomatically, you may want to remind your clients that if a vacation property really is an investment property, misrepresenting it to gain access to more favorable financing is not allowed. It fact, if it is strictly a rental unit, doing so could be considered an act of fraud.
The Residential Business
While larger investors are able to finance their properties as businesses, individuals need guidance to determine how they can enter the residential rental business on a smaller scale. For Loan Officers, this represents an excellent opportunity to meet an underserved part of the market and help educate and attract these potential borrowers through blog posts, webinars, and other how-to materials, even social posts. Helping these small businesses grow can help yours grow as well.