Frequently you hear that buying a home in California is a good investment. Taking it a step further, purchasing multiple houses as rental properties can also be a great way to increase your assets and make money. However, be aware of some basic differences between buying a property as your home and purchasing properties to rent out.
The Benefits of Buying Properties for Rental Income
What are the reasons you would want to buy properties and rent them out? For many, there is the allure of having an income after retirement. Your tenants’ rent may cover the monthly mortgage payment until it is paid off, at which point the payments become an extra income stream.
Real estate can also be a wise investment due to appreciation. You may be able to sell the property at a much higher price in the future vs. the current value so you can use that money to pay for retirement. Since the tenants paid your mortgage, the sale price is almost all profit. You may also choose to leverage the home and accumulated equity to pay for other expenses.
The buying process
You can get a home loan to buy a rental property in California just as you would with a residential property. However, take note of these major differences between the two.
- Loan products — You won’t qualify for some of the loan products that are available to homebuyers, such as FHA or USDA loans.
- Down payment — You will generally need at least 20 – 30% of the property price for your down payment, and there won’t be the flexibility here that’s available for home buyers in California who purchase a property as their residence.
- Reserves — You will need more reserves than if you were buying a personal home. You may need to have enough cash on hand for six months of payments on both your home and any rental properties you own.
If this is the first rental property you are buying as an investment in California, you must use non-rental income to qualify. This will be in addition to any other mortgages you currently have. If you already own rental properties and can prove that you have at least two years of experience in the field, you may be able to include rental income from other properties.
How to be prepared
If this is your first time buying a rental property, you must know several things. Make a plan, and avoid problems down the road; for example, know what you will do if you don’t get the property rented right away. In this scenario, you will have to carry the mortgage payment, taxes, and insurance.
When something breaks, you, not your tenant, will have to fix it—because of housing laws perhaps more quickly than you would fix your own property. A rental property is not a liquid investment and should not be considered a quick source of cash.
Research the responsibilities and considerations of being a landlord and become well-acquainted with the area where you are buying. Determine the potential return on your investment. Decide if you will manage the property yourself or spend additional money to hire a management company.
Buying a house as a rental property is not a get-rich-quick scheme, but a long-term investment that may yield good returns over time. If you are prepared and have a lender that you can rely on, this can be a lucrative investment for the future.
Buy under market value and pay off mortgages early
There is a method that involves taking all the income from rental properties and using it to pay off one rental property at a time. Paying off a mortgage early feels great and has many advantages. If you buy under market value, you’ll have great cash flow to pay off one mortgage at a time. Once a mortgage is paid off, it brings in more cash flow because there is one less mortgage payment. That extra income is applied to the next property’s mortgage and it is paid off even faster.
Why not invest extra cash flow into buying more properties?
It’s preferable to not buy more properties with the extra income. Many banks limit how many loans you can have. Some banks won’t loan on more than four properties, and some on more than ten.
Having cash available is a huge advantage in the real estate business. Banks easily give lines of credit on houses that are completely paid off. A line of credit is as good as cash in the real estate world. If the mortgage is paid off early, it’s an advantage when dealing with banks.
Should you buy more rental properties or focus on paying down the ones that you own? That’s not the question you should be asking yourself. The real questions are: What do I want out of life? And how much debt am I willing to accept in order to reach those goals? Once you answer those two questions, the “buy more versus pay down?” question will be easier to answer.
Golden State Mortgage Can Help
At Golden State Mortgage, we are a California based mortgage company, and specialize in FHA home loans for first time home buyers. FHA loans are a great option for first time home buyers and if this is your first home purchase then a California FHA home loans are probably your best option due to the low down payment and easier credit standards. Your down payment can be as low as 3.5% of the purchase price, and closing costs and fees can be covered by the seller. Call Golden State Mortgage today at 1-888-502-2136 or fill out the quick contact form to speak with a California FHA loan consultant and get a free good faith estimate.