For many people out there, the goal of being a first-time homebuyer has been ebbing at them for a long time. Having a space to call their own, ditching a landlord they may not be fond of, and finally building some equity are all reasons why many choose to do so. But some are thinking about taking their first homeownership down a different path: they are wanting to become landlords. Even though there are some very basic elements to consider that will affect you, this can be a very viable and profitable decision! Today we will go over some different ways to achieve this goal, and things to keep in mind.
Using your first home as an investment property is absolutely possible, but it may turn out to be a bit expensive for you. To accomplish this, you will need to take out a mortgage for an investment property, and these generally may have higher rates, as well as credit score requirements that are a bit higher than a traditional, owner-occupied mortgage. Down payments may be higher, because the lender recognizes that this could very well be your first attempt at maintaining and managing a separate stream of monthly income. You can expect to put usually around 10% to 30% down, depending on the type of property you are looking to acquire. This hurdle is not as intimidating for some, but is the main reason that many choose to live on the property, to acquire a better rate.
You can acquire an FHA loan for a property that has up to 4 units, as long as it is occupied by the owner. An eligible borrower can get FHA’s low 3.5% down payment on a property that is on the smaller side of the spectrum in regards to size. One fine detail to keep in mind is that if you want a property that has more than two units, you will also need three months of mortgage payments for the future set aside, as well as a cash reserve on hand to assure you qualify. Here are some limits that exist for FHA loans in this category:
- Two units: $533,850
- Three units: $645,300
- Four units: 801,950
Some buyers that have never owned a property find themselves realizing that being a landlord is not that simple. Unforeseen upgrades along with destructive tenants are some of the surprises that no one enjoys dealing with, and can sneak up on you to ruin your future dreams during your first rental endeavor. Having a thorough understanding of local laws is also very important when it comes to being a landlord, especially when you are doing your duty of collecting rent, or dealing with evictions. If you live out of town, you may opt to choose a management company that can help you with the duties so you are not scrambling to cover your bases from 50-100 miles away.
This is one reason that an owner-occupied property could be the best route, especially if you were looking into purchasing a duplex. It’s another great option for the duration of the learning curve, because you can get started learning the ropes, and renting out the other unit in most cases covers your mortgage payment. Then, when you are ready to scale up to another home, you can keep the duplex as a straight rental. The best attitude to keep is one that allows you to know that you won’t get rich quick, and that it’s a long-term plan for a bit of stability. Even though a standard living residence is a common first choice, with a bit of thought and planning, becoming a first-time landlord is a rewarding, and potentially profitable experience.