(530 W. Girard Ave 4 in Northern Liberties)
Buying Rental Property as an Owner Occupant
The easiest way to buy rental property is as an owner occupant. Some states require as little as 3.5% downpayment if an owner is buying with the intention to rent out part of the property. You can even count the income from any leases that are in place in some cases. Remember you aren’t going to live there forever, so it’s wise to buy a space that makes sense as a rental, whether it be a property with multiple unites or a house where you can afford the property taxes and upkeep for the renter.
The mortgage for an occupant owner doesn’t change once you move out of the space and start renting it to someone else. This is definitely the best route to go when you do not have a lot of cash to put down for buying a property. Moving in to a space as an occupant owner also gives you a year to see what needs to be done to the space, so you can rent it out later.
There may be issues such as a leaky faucet or mold issues that have to be taken care of before you can rent the space out. It also gives you time to learn about renter’s rights, which vary from state to state. Renter’s rights are very important and can make the difference in an easy going landlord experience or one that’s torture.
Buying as a Rental Property
This can be done, but it is expensive. You must come up with anywhere from 20-30% of the downpayment. That’s the major difference from buying as an occupied owner, as well as the fact that you don’t have to live in the space for a year (or at all). You should have very good credit to qualify for the best loan possible. There are also closing costs and renovation costs to consider when buying property you intend to rent.
All of this can end up costing as much as 40% of the property up front, with only the first 20-30% going to the actual mortgage. This means you’re coming up with $40,000 for a $120,000 property. This can work out to your advantage if you have the cash to put up, and the property is already occupied with long term tenants.
Before your first mortgage payment is due, you can request a month of rent from tenants, which means you can apply the rent to the mortgage payment. If the space is already rented, there’s also a chance the renovations or maintenance you have to do at the beginning is minimal.
How Do I Get Started?
You want to meet with anywhere from two to four different lending companies to get an idea of rates. There will be different requirements for those buying under Occupied Owner (OO) and Non-Occupied Owner (NOO). A good idea is to meet with a couple of banks, a lender or mortgage broker and an online lender. Each will have different criteria, which means one may reject you, while the other is able to offer a relatively low rate for your loan.
Owning rental property can be a great way to build up your portfolio. It isn’t easy to be a real estate investor, but purchasing a owner occupied property may be the perfect way to get started.
