- Market Trends
- Home Improvement
- Unique Homes
- Tips & Advice
How Much Does It Cost to Move?
By Mary Boone on 23 Mar 2018
The dollars and cents that go into moving vary greatly depending on a number of factors.
- Find homes for sale
- Search for rentals
- Check the latest mortgage rates
- Get home design inspiration
- Connect with a local agent
These days, many people hear in the news that it’s a good time to buy rental property and so they’ve decided that they would like to get started in the property rental business, (a.k.a. being a landlord).
But, in order to get into the rental property investment business, how do you obtain mortgage financing to purchase your first rental property? It’s true that it has become a lot harder to get financing these days; but for people with decent credit and sufficient income there is still plenty of money available to borrow. For terminology purposes, when you borrow for a rental property, it is called non-owner occupant (NOO) financing. Let’s run through some financing issues, items and suggestions that may help you.
Buy As an Owner Occupant (OO)
The best way to get into the landlord business is to buy a home that makes sense as a rental property, but you buy it as a personal residence, and live there for the required twelve months that an OO loan requires a borrower to do. As an owner occupant, you get the best financing terms and you may be able to put down as little as 3.5% with FHA financing. The loan stays in place with the original terms when you move out and make it a rental. It’s the best way to go!
Other reasons this makes sense:
- You move into the property and learn the property specifics, issues, kinks, etc. and have them fixed before you move out and make it a rental property.
- You also do any renovations and upgrades you need and you are not making two housing payments, like someone would do if they bought a property and were simply rehabbing it to rent it out.
- Lastly, you are more selective and only buy properties that you are willing to live in, and that’s a smart way to go for investors; don’t buy properties that you wouldn’t live in.
Then, after 12, 24 or 36 months, buy your next owner-occupant property and rent out the original one. Then repeat, and repeat, and repeat again once every one to three years.
Buy as a Straight Rental Property
Let’s say you just want to buy it as a straight rental property. First up, you need a 20-25% down payment for most lenders (Fannie Mae and/or Freddie Mac may have some 10% investor properties, so check those out too). And that 20-25%, plus closing costs and renovation costs, might add up to 30% – 35% cash upfront to close escrow and get a property rental ready. So, for a $120,000 property, that could easily be $40,000 cash needed. That owner-occupied 3.5% FHA loan sounds pretty good right now, huh?
As noted above, you also need to have good credit and qualify for a bank’s financing for an investment property. One nice thing about rental properties is that the bank may include some estimated net rental income from the property to help your debt-to-income ratios, especially if you buy something with a tenant already in place. Discuss this with your lender.
Speaking of tenants already in place, there are some significant advantages therein too! For example:
- You get the security deposit from the seller at closing and some pro-rated rent
- You probably collect the first month’s rent a month before your first mortgage payment is due
- There is no vacancy, so you don’t need to find a tenant, and
- You probably won’t have to rehab the property until they leave.
The negative could be a lower than market rental rate or a tenant who pays late, doesn’t pay, or doesn’t take care of the property. But they could be a great tenants, too! Once in escrow, do a little looking around the apartment and talk to the tenant to make a determination if you want to keep them or terminate their lease when it ends. Convey this to the listing agent so that agent can alert the tenants either way.
Rates, Costs, Fees on Investment Properties
The costs of doing any mortgage loan these days are much higher than they used to be just a few years ago. And non-owner occupant (NOO) investment properties are even higher. Small dollar loans, like under $100,000, have very high fees as a percentage of the loan amount. Possibly up to 5% when you add in the loan origination points, fees, appraisal, underwriting, title insurance, escrow costs, etc. But the present rates are really very competitive and you can get NOO financing at 4.5% on a 30-year amortizing loan these days. And that is dirt cheap, locking in a 30-year low interest rate loan on a rental property.
Where Can You Find Loans?
Right when you start you should meet with two to three lenders and see what NOO loan programs they have for what you plan to buy. Try a bank or two, plus a mortgage broker or correspondent lender, and an online lender. Different lenders have different programs and a bank may reject you but a mortgage broker might have a program that works for your situation, so check around. Loan costs and rates will also vary, so get a couple of estimates and compare them to find the best deal.
How many properties can you buy? If you have the credit score (estimate your credit score), and the debt to income ratios (which change with each property you buy), you can pretty easily finance up to four properties. Once you go over four and up to ten, the number of lenders who can finance you gets much lower, but they are still out there. The underwriting criteria also may get much tougher, but still possible. Once you go over ten loans, it’s really hard to find lenders who will finance and the loan costs, interest rates, and terms will be less appealing, but still relatively reasonable. Lenders who do over ten loans are called portfolio lenders.
In summary, this is a very good time to buy property, but you must educate yourself on rental property ownership, do your due diligence, and don’t think everything is going to be rosy and hassle-free, because real estate is hard work! Hopefully the hard work you do and issues you have to handle over the years will just be distant memories when you retire with a nice rental property income stream.
(Note: Many thanks to Robin Hill who contributed her guidance for this article. Robin is a San Diego-based mortgage lender for First Cal. She specializes in residential purchases and refinances for owner-occupied and non-owner occupied properties. She’s been in the mortgage business for the past 14 years).
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.” Read useful tips for real estate buyers in his blog, Making Smart and Safe Real Estate Decisions. See more at ProfessorBaron.com.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
Here’s what you need to know.
- Meg Stefanac
- мая 7, 2020
When Lisa Sanford accepted a job in post-Katrina New Orleans, she was not entirely sure how long she would be staying. She and her husband sold their Birmingham, AL home and began renting a house in Gretna, LA. After a few years, the couple was certain that they wanted to live there long-term and they ended up buying the house they’d been living in.
If you are currently renting a house and want to stay in it long-term, you may want to do something similar to what Lisa Sanford did. Home ownership will enable you to start building equity while also permitting you to make and enjoy improvements to the property. Furthermore, although your property taxes may fluctuate a bit, you will no longer need to be concerned about annual rent increases.
So how do you go about making the transition from renter to owner? The process of buying the house you rent begins with one important step: talking to the home owner. But first, make sure you’re covered with an affordable home insurance policy.
Talk to the Home Owner
In some cases, landlords approach their renters. If they are planning to sell the property anyway, they may give their tenants the opportunity to purchase the house before they list it. In such a case, the home owner will likely already have a purchase plan in mind, and you will then have to decide if you are interested.
Otherwise, you will need to contact the property owner and express your interest in purchasing the house. It is not always easy to convince them, so you may have to come up with a creative and compelling argument as to why making the sale would be in their best interest. This is what Lisa Sanford had to do.
“My landlord did not readily accept my offer to buy the house,” states Sanford, “I had to coax him by explaining that I was buying regardless of his decision. He considered the difficulty of preparing the home for a new renter and realized that he would not be able to collect the same rental charges, since post-Katrina prices had normalized. I had to guide him to the decision using those factors.”
Regardless of who makes an offer first, if your landlord is agreeable to making a sale, you may be able to go about making the transition from renter to owner in one of three ways.
Option #1: Purchase the House Immediately
If you and your landlord agree on a purchase price and you are able to qualify for a mortgage, you may be able to set about buying the house immediately. In such a case, your landlord will most likely not employ the services of a real estate agent, which means that you will need to treat this as a For Sale By Owner purchase. Enlisting the services of a real estate attorney can help you be sure that the transaction runs smoothly.
Amy Fontinelle of Investopedia recommends that you look at other similar properties that are for sale in the same neighborhood or ask to have the house appraised before you agree on a purchase price in order to ensure that you are not being asked to pay too much. Feel free to negotiate.
Before you jump into a deal like this, be sure that you are fully aware of what your monthly costs will be as a mortgage holder. Remember, in addition to the mortgage principal and interest, you will now be responsible for paying school taxes and other property-based taxes as well as homeowners insurance premiums, which are significantly more expensive than renters insurance premiums.
Be sure to compare the full cost of home ownership to your current rent payments to make sure that you will not be overwhelmed financially. In some situations your monthly payments may actually be lower than your rent payments, in which case, you are entering into a good deal.
Option #2: Enter into a Rent-to-Own Agreement
A rent-to-own agreement is a good idea if you do not yet have sufficient money saved up for a down payment. When you enter into a rent-to-own agreement, you will start paying your landlord an additional sum of money each month and this money will go into an escrow account to be used as a down payment after a specified amount of time, typically three to five years.
Rent-to-own agreements should always be made in writing. Katherine Lewis of MSN Real Estate recommends that both parties work with a real estate attorney when drawing up the agreement contract.
The downside to rent-to-own agreements is that if circumstances in your life change and you no longer wish to purchase the house, the home owner will be able to keep all the money that you paid toward the down payment. Additionally, if you are unable to qualify for a mortgage after the designated time period, you will also forfeit your down payment money to the landlord.
Lewis warns “Before you consider a rent-to-own agreement, make sure you understand the possible pitfalls. One misstep and your dream of home ownership could go up in smoke.”
Option #3: Enter into a Lease-Option Agreement
A lease-option agreement is similar to a rent-to-own agreement with one major difference: You are under no obligation to buy the property. With a lease-option agreement, you will have a legal option to purchase the property at an agreed-upon price after a given period of time.
“This affords more flexibility in case your circumstances change, as circumstances are wont to do,” writes Steve McLinden of Bankrate. As with the rent-to-own option, lease-option agreements should always be made in writing. Oral agreements are never binding.
Enjoy the Benefits of Home Ownership
We believe that everyone should have the opportunity to own their own home, and we wish you the best of luck in your endeavor. If you end up buying the house you rent, you may want to speak to a local agent to discuss the insurance implications.
These agents can not only help you find affordable homeowners insurance, they can also help you review any other insurance policies you carry to ensure that you are not paying too much. Frequently, policy discounts are available to home owners, so don’t miss out on these savings.
Share this page on Twitter Share this page on Facebook Share this page on LinkedIn
- Buying a House
- Buying a Car
- Starting a Business
- Ask an Agent
- Insurance Companies
- Independent Agent 101
I did a lot of searching for a homeowner’s insurance and I went with TrustedChoice.com because it provided the best rates and coverage.
Bradley of Newark, NJ
Dos and Don’ts
While there are financial benefits to investing in rental property, there are risks—tenants who don’t pay their rent and the headache of being a landlord—as well. You’ll need to weigh taxes, real estate appreciation, mortgage, and maintenance costs, and your desire to be a landlord when deciding if owning a rental is a wise financial move.
- There are several key advantages to buying a second home for a rental property, notably tax advantages, such as deductions for interest, insurance, and other expenses.
- On the downside, you’ll have to be a landlord—which includes time and energy.
- One of the best things prospective landlords can do is their real estate homework and run the numbers
Do Think About the Tax Advantages
You can deduct interest, taxes, insurance, and other expenses against the property’s income and usually deduct losses against your other income. You can also deduct depreciation from your taxes.
The deduction is basically an allowance for wear and tear over 27.5 years as of March 2020. You can sell a rental property and roll the proceeds into other rental property without paying capital gains taxes.
Don’t Forget You’ll Be a Landlord
Your rental property is a business that requires time and energy. You’ll need to keep up-to-date on rental laws and are legally required to maintain a safe and habitable property for your tenants.
Remember that a tenant paying top dollar has a right to expect a near-instant response to any problem, large or small. Renters who know they are paying a little under market will tend to be a little less demanding. It helps if you can do minor repairs yourself. You also have to collect rents and deal with delinquent tenants.
If the prospect of managing your own rentals is daunting, ask your real estate broker for a referral to a property manager or caretaker or do an online search. Just be aware that hiring a property manager will eat into your returns.
Do Your Real Estate Homework
Spend as much, if not more, time researching rental property as you would buying a place to live in. You must know the market specifics, zoning laws, and trends for both rentals and home sales in the location you are contemplating. Look at schools, transportation, recreational resources, shopping, and what tenants in the area expect in a rental.
Buying a foreclosure can be an option since the foreclosing bank typically wants to recover the mortgage balance and will sell the property at less than market value.
You’ll want your property to be attractive to renters. Look for a property with waterfront or close to a college campus or a local school zone. An older house in a stable community or one in a neighborhood being revitalized can be a good option as well.
If you buy an investment rental property on a new golf course beware of the “golf course syndrome.” If newer and fancier golf course housing is built in the same general area, your property could appear dated in a few years which will depress the price.
Don’t Neglect to Run the Numbers
Use smartphone apps or online mortgage calculators to analyze your monthly housing costs. A calculator should allow you to enter the purchase price, down payment, taxes, insurance, and mortgage loan interest rate. The mortgage rates on rental properties are typically higher than the rates for a primary home. Also factor in maintenance and repairs. A good rule of thumb is about 1% of the purchase price per year.
So a $300,000 property would cost roughly $3,000 per year to maintain. However, you may want to increase the percentage to 1.5% or 2% if the property is older. Another way to calculate repairs and maintenance is to adhere to what is sometimes called the “square foot rule,” which suggests homeowners budget $1 per square foot per year. If your rental home is 1,800-square feet, for example, you are looking at $1,800 a year in repair and maintenance costs.
Tips for the Prospective Landlord
Real World Example
Here is an example of projected income: Say you are renting a $300,000 home for $2,000 per month. The 20% down payment is $60,000, and the 30-year fixed interest rate on the $240,000 balance is 4%. Taxes, insurance, and a maintenance budget will bring the monthly cost to $1,764, yielding a nominal profit of $2,838 per year, or 4.73% of the down payment per year. Not bad.
That’s much better than a savings account and better than most blue-chip stocks pay in dividends, although perhaps not as much as you could earn in the stock market in a good year. But when you calculate the typical depreciation of 3.64%, the nominal gain of $2,838 becomes a loss of $6,252, which you can apply against other income. However, depending on your tax bracket, that could amount to several hundred dollars of tax savings to a positive cash flow plus the possibility that the home will appreciate in value.
The Bottom Line
Investing in real estate for income is not for everyone, but if you treat your investment as a business, have a tolerance for the inherent risks, and are handy with a hammer, the financial benefits can be substantial.
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Before you start buying houses to rent, it’s crucial to understand how much you’ll need for an investment property down payment, which could be 15% of the purchase price or more.
- What’s the minimum down payment for a rental property?
- How much investment property can you afford?
- 3 ways to make your investment property down payment
- How to get approved for an investment property loan
What’s the minimum down payment for a rental property?
In most cases, the minimum amount for an investment property down payment is 15%. However, the down payment you’re actually required to pay is determined by several factors, including your credit score, debt-to-income ratio, loan program and property type.
|Loan type||Minimum down payment|
To qualify for a 15% down payment for a conventional loan for a one-unit investment property, you’ll need at least a 700 credit score in most cases. One exception is if your debt-to-income ratio is equal to or less than 36%, in which case, the minimum credit score required is 680. The down payment required for an investment property with two to four units is 25%.
If you plan to buy a multiunit investment property that will double as your primary residence, you may be eligible for a government-backed loan from the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).
You can borrow an FHA loan to buy an investment property with up to four units with as little as 3.5% down, provided you occupy one of the units as your main home. You may qualify for a VA loan on a one- to four-unit property with a 0% down payment; however, one of the units must be used as your primary residence.
Note about second/vacation homes
If you plan to buy a vacation home, you’re required to make a minimum 10% down payment. Fortunately, you can use it as an investment property.
As long as you live in your second home for 10% of the time it’s available for rent or more than 14 days — whichever time frame is longer — IRS rules allow you to use the home as a rental property investment.
How much investment property can you afford?
Qualifying for an investment property mortgage involves proving your ability to comfortably manage the monthly payments. Before you make purchase offers, it’s wise to apply for a mortgage preapproval. This is the most straightforward way to determine how much investment property you can afford to buy.
Once you have a price range, take some time to research the local rental market online. Your lender will most likely consider 75% of your expected rental income as part of your loan application. This can be done easily if the property was already an investment property and there’s a rental history to evaluate. Otherwise, your lender can look at market rents in your area to come up with a reasonable estimation of rental income.
Don’t forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but aren’t limited to:
- Landlord insurance
- Property taxes
- Maintenance and repairs
- Property management fees
3 ways to make your investment property down payment
1. tap your home equity If you have at least 20% equity in your primary residence, you could take out a home equity loan or use the proceeds from a cash-out refinance as a down payment for a rental property.
2. Try owner financing Instead of going through a traditional mortgage lender, you could try to arrange an owner financing deal with the home seller. You’d agree to a repayment agreement directly with the seller and sign paperwork giving the seller the right to foreclose if you fail to pay the loan.
3. Save over time This option can take the longest to achieve, but it doesn’t involve borrowing. Having the cash reserves set aside for your rental property investment helps illustrate your readiness for the landlord role.
How to get approved for an investment property loan
To strengthen your chances of approval for a conventional investment property loan, you’ll need to meet the following loan criteria:
- A minimum 15% down payment. However, if you’re buying a multiunit property as a primary residence and going the house-hacking route with a government-backed loan, your minimum required down payment could be less.
- A minimum 700 credit score. Unless you plan to make an investment property down payment of 25% or more, you’ll need at least a 700 credit score. To get quoted the best mortgage rates though, improve your score to 740 or higher.
- A maximum 45% DTI ratio. The percentage of your gross monthly income that is used to pay your monthly debt can’t exceed 45%.
- A minimum of six months in reserves. You’ll need at least six months in cash reserves to buy an investment property. Your lender wants reassurance that you can continue to pay the mortgage when you’re in between tenants.
Arguably, the most important of these factors is your down payment amount. While your credit score, DTI ratio and savings hold weight, how much money you put down can make or break your real estate investing goals.
Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.
Brandon began buying rental properties and flipping houses at the age of 21. He started with a single family home, where he rented out the bedrooms, but quickly moved on to a duplex, where he lived in half and rented out the other half.
From there, Brandon began buying both single family and multifamily rental properties, as well as fix and flipping single family homes in Washington state. Later, he expanded to larger apartments and mobile home parks across the country.
Today, Brandon is the managing member at Open Door Capital, where he raises money to purchase and turn around large mobile home parks and apartment complexes. He owns nearly 300 units across four states.
In addition to real estate investing experience, Brandon is also a best-selling author, having published four full-length non-fiction books, two e-books, and two personal development daily success journals. He has sold more than 400,000 books worldwide. His top-selling title, The Book on Rental Property Investing, is consistently ranked in the top 50 of all business books in the world on Amazon.com, having also garnered nearly 700 five-star reviews on the Amazon platform.
In addition to books, Brandon also publishes regular audio and video content that reaches millions each year. His videos on YouTube have been watched cumulatively more than 10,000,000 times, and the podcast he hosts weekly, the BiggerPockets Podcast, is the top-ranked real estate podcast in the world, with more than 75,000,000 downloads over 350 unique episodes. The show also has over 10,000 five-star reviews in iTunes and is consistently in the top 10 of all business podcasts on iTunes.
A life-long adventurer, Brandon (along with Heather and daughter Rosie and son Wilder) spends his time surfing, snorkeling, hiking, and swimming in the ocean near his home in Maui, Hawaii.
Sell your property with ease – no showings or disruptions to your tenant.
Roofstock makes investing in single-family properties radically simple.
FOR LARGE INVESTORS & INSTITUTIONS
Acquire, manage, and sell properties at scale with the experts in single-family rentals
FOR LARGE INVESTORS & INSTITUTIONS
From marketing through close, our industry experts run portfolio processes.
More than $3 billion in completed SFR transactions in less than six years
Unique 30-day money-back guarantee + guaranteed lease up on vacant properties
Make investment decisions using insights, proprietary data and technology
Why single-family rentals (SFR)?
Provides strong, stable cash flows even through economic cycles
CURRENT SFRS IN US
NEW RENTAL HOUSEHOLDS BY 2030
Meet our investors
Having the Roofstock safety net around the transaction makes remote single-family home investing almost as simple as using a robo-advisor for stocks. It definitely simplifies the experience.
2 properties in TX and TN
I’ve never been to Memphis, we’ve never seen (the property we bought on Roofstock.) It appraised for $30K more than we bought it for before it even closed. Our renters have been great, we’re cash flowing every month. it’s just been wonderful.
2 properties in GA and TN
Investing in SFRs just makes sense! Particularly when you buy in a neighborhood with good schools (which Roofstock helps you to identify). Because families with children tend to stay long-term, you get a lot less renter turnover.
3 properties purchased in GA
There is full transparency for you to make the best decision based on your investment strategy. Furthermore, [the Roofstock team] stays in close communication with you throughout the closing process and makes sure everything is in place for you to collect money on day one.
4 properties purchased in GA and NC
The certainty of having a tenant in place and knowing the rent up front really helped me feel confident making my first real estate investment.
4 properties purchased in GA and FL
Founded by pioneers in the single-family rental space, Roofstock has assembled a world-class team of real estate and technology professionals committed to a clear mission:
Making real estate investing radically accessible, cost-effective and simple
In the news
The only online marketplace that allows investors to buy leased single-family homes without interrupting tenant occupancy.
The way Roofstock works is pretty straightforward. If you want to buy a single-tenant home that’s already leased, Roofstock’s marketplace offers a variety of properties at different price points.
Roofstock has the potential to introduce liquidity into a market that has traditionally been illiquid.
Three ways to get started
1. Create your investor profile
Answer a few short questions to activate a customized dashboard and property recommendations based on your investor profile.
2. Speak with an expert
Talk with our expert team for a complimentary strategy session or to answer any questions you may have.
3. Get training from experienced investors
Enroll in Roofstock Academy and access 50+ hours of on-demand lectures, 10 hours of 1-on-1 coaching, and entry to our private member coaching forum.
- Buy Properties
- Sell Properties
- Manage Properties
- Agents & Brokers
- Become an Affiliate
- Broker Licenses
- Preferred Property Managers
- Cloudhouse Rental Calculator
- Track and Optimize with Stessa
- About Us
- What We Do
- Our Team
- How It Works
- Portfolio Investments
- Knowledge Center
- Bring Your Own Property
- Certification & Guarantee
- Roofstock Academy
- 1031 Exchange
- IRA Investing
- Contact Us
- General Inquiries
- (800) 466-4116
- [email protected]
#1 ranking based on website traffic from Alexa.com as of 1/30/20. Over $3 billion in transactions since 1/26/16 as of 5/1/21.
Roofstock strives to provide a wide array of services to investors, including services from partners that provide financial services, real estate brokerage and property management services. These partners do not represent all of the available options and Roofstock does not guarantee their services. Some of these partners may compensate Roofstock for customer referrals.
- How to Qualify to Buy a Rental House
- The Safest Types of Rental Property Investments
- How to Calculate Triple Net Lease
- How to Estimate Maintenance Cost for Rental Properties
- How to Buy a House on a Frugal Budget
Rental properties provide all of the traditional benefits of property ownership while providing the added benefit of a regular and consistent source of monthly income. Rental properties are an attractive investment option as rental properties not only appreciate in value but also can provide investors with an asset that can be inhabited in times of financial trouble. While the process for acquiring a rental property can be lengthy and complicated, you have ways to avoid many of the problems that first time buyers often encounter.
Choose a location that has strong rental demand. Some cities are better for rental property owners than others because demand is strong year round for rental properties. Always ensure that the rental property is in an area where rents are increasing and the number of tenants matches or exceeds the number of rental units. While urban centers typically meet these requirements, more suburban locations near colleges and universities can also work well.
Investigate the property to ensure that the cost associated with ownership and maintenance will not take too much of the anticipated monthly income flow. Contact the local tax office to determine what the taxes for the property have been historically. Hire inspectors to ensure that the property’s heating and cooling system are not in need of repair or replacement.
Create a realistic financial plan for the rental property. Research rents in the area where the property is located and ensure that the plan is not based on obtaining rents that are higher than market average. Additionally, ensure that a reserve capital fund has been established to cover the costs of owning a building. Buildings require maintenance and repair that can add up to significant amounts of money each month. Never purchase a building without having enough money to cover the worst case maintenance or repair scenario.
Prepare to pay more for a mortgage for rental property as banks and other financial institutions price loans for second or investment properties higher than those for primary residences. If at all possible, raise money for the investment property by obtaining loans from friends and families.
by Stephen Michael White
December 27, 2019
- Landlord Tips
While most landlords are in the rental business for the long haul, that doesn’t mean that you won’t be buying or selling properties from time to time. In fact, you may want to let go of some properties that aren’t your ideal investments as your management style changes. It makes sense to make continuous adjustments to how you do business.
One fairly common way that landlords like you might sell a property is when a tenant wants to buy the property that they have been renting for you. What’s the process if your tenant wants to buy your property?
Many landlords worry when this happens: “my tenant wants to buy my property; won’t I lose money?” There are some situations where you can actually make a great profit by selling to a tenant. If you are in that type of situation, it’s time to learn how to move through the sale process efficiently and effectively.
A Table Of Contents For Selling Property To Your Tenant
- Step 1. Decide If You Want To Sell
- Step 2. Hire Your Sales Team
- Step 3. Negotiate The Price
- Step 4. Review Documentation
- Step 5. Close The Sale
Step 1. Decide If You Want To Sell
The first step of the sale process, of course, is to be sure that you want to sell! Often, a tenant will approach a landlord out-of-the-blue and suggest a sale because they really want to say in the house long-term. In these cases, the landlord might not yet be sure if they even want to sell!
Take some time to think about your long-term goals and the area where the property is located:
- How much equity do you have in the property?
- Are home values rising in the area?
- Is there a large rental market?
- Are there any homes in the area that would make good investments available?
By working through all of these questions, you can get a better idea of where your head is at in terms of selling the property. If you are immediately reluctant to the idea, simply tell the tenant that you are not interested at this time. If, however, you are amenable to the idea, proceed with the next steps.
Next, you will also want to make sure that they are ready to buy and pre-qualified for the right mortgage range. There is no reason to waste your time on a sale process that isn’t going to go anywhere, so it’s best to be upfront about this.
If your tenant isn’t in a financial position to buy just yet or you aren’t sure, you might want to consider adding a first-right-to-refusal clause to your rental agreement. This type of agreement gives the tenant a chance to purchase the property before others, and it can give both parties peace of mind in some situations.
Step 2. Hire Your Sales Team
Once you’re sure you want to move forward with a sale process, start building your team for the sale. You’ll want to get into contact with a real estate attorney. A real estate agent is not needed for this type of transaction because the property will not be on the open market; what you need is an attorney to represent your interests.
Typically, the buyer will set up the closing company, but your attorney can help do that as well. The buyer’s bank is also likely to require an appraisal before the sale goes through, so they will be responsible for bringing in an appraiser as well.
Ultimately, a combination of the following can get the job done:
- Real estate attorney
- Realtor (if needed in your state or local jurisdiction)
- Title company
In many cases, you will be able to find an attorney or a real estate agent that will handle the process for a flat fee. Depending on your budget for the transaction, you can make your choice about what type of team to assemble.
Step 3. Negotiate The Price
One of the biggest parts of the process of selling to a tenant is negotiating the sale price.
Tenant ideas about what is a reasonable and fair sale price can be very different from the ideas of their landlords. Sometimes the landlord is thinking much higher; at other times, tenants offer more than landlords expect them to offer.
Start by doing some market research on recent appraisal values in the market as well as average sale prices. By using an agency listing source, you can get high-quality information that will help you figure out a starting point.
If you aren’t sure and want an expert opinion to make sure the process goes smoothly, you could hire an appraiser for under $400 in most areas to do a property valuation. Be careful about using this, however, as the appraisal might come back lower than you expect it to.
Many landlords will set sales to tenants are the appraisal value minus 6% as realtor fees wouldn’t be needed.
The Landlord-Tenant Discrepancy
It’s important to maintain your composure and keep your patience while doing this step of the sale process.
Tenants that have lived in your properties for many years often begin to think of themselves as the property’s rightful owners, and they may even believe that the changes they have made over the years should earn them a discount. In reality, those changes might need to be reverted before you could make a market sale.
On the flip side, you know that these tenants love the property, and that’s why they want to buy! Despite any wear-and-tear, they know that the property is a good one, and they are interested in owning it. For some properties, finding a buyer on the market would be very different in comparison to selling directly to one of your tenants.
Step 4: Review Documentation
Once you’ve agreed on a price, the buyer’s attorney would usually be the party responsible for writing up the sale agreement according to local and state laws. Then, your attorney would review the documentation before any signing occurs.
The agreement should include any and all agreements that you have made regarding the sale price and extras that either party is including in the sale.
Step 5: Close The Sale
Finally, it’s time to close the sale! Before the closing, the buyer’s bank will order an inspection to ensure that the transaction can be properly financed. Your attorney and the closing company will work you through these steps. Once they’re complete, you’ll be ready to complete the closing and finish the sale.
How Can A Tenant Buy The Property They Live In?
Now you know all of the basics of what you need to know about selling a property to a tenant. The key points are to:
- Decide if you want to sell
- Hire a real estate attorney
- Decide a price
Once you have a real estate attorney or even an agent working through the sale process with you, you’ll be able to make it through the rest of the process with relative ease! In these cases, it’s always best to rely on an expert to be sure that no mistakes are made along the way.
In some ways, selling a property to a tenant is simpler than selling a property that has a tenant still living there, but both situations simply need to be handled with care and caution to ensure that you make the most profit that you can.
- Expected Returns on Rent
- How Do Landlords Make Money?
- Rules for Buying a Non-Primary Home
- Can Mortgage Interest Be Carried Forward?
- What Can Person Do to Work Towards the Goal of Buying a House?
You can unlock the equity in your home to help finance the purchase of rental property. To do so, you’ll need to take out a home equity line of credit (HELOC) or home equity loan on your home and use the money toward the down payment on the rental property. Under favorable circumstances, the rental property will generate sufficient income to pay all expenses plus provide you enough earnings to make the transaction worthwhile.
Figure Your Available Equity
The equity in your home is equal to its current appraised value minus the amount you owe in mortgage debt. A HELOC is a revolving line of credit secured by your home’s available equity. HELOCs are available that will lend you up to 90 percent of the home’s appraised value minus mortgage debt. You can use your HELOC for any purpose, including the purchase of a rental property.
For example, suppose your San Francisco home currently appraises for $500,000 and you owe $350,000 on your mortgage. A 90-percent HELOC will provide you credit equal to (0.9 x ($500,000 – $350,000)), or $135,000. This is the maximum amount you can draw from the HELOC. Some HELOCs offer interest-only credit for the first 10 years before you have to start repaying principal, but the details depend on the bank providing the HELOC. You pay interest on only the amount drawn from the HELOC, and there is no charge if you have a zero loan balance.
Buy a Single-Family Rental
You can use your HELOC for the down payment on the purchase of a single family home that you will rent out. Rental property loans typically require a 25 percent down payment. Therefore, if your credit line is $135,000, you can purchase a property selling for as much as $540,000 (i.e., $135,000 / 0.25). After putting down $135,000, you’ll need a mortgage of $405,000 to finance the rental property. For the transaction to make sense, your rental income must exceed your monthly expenses, which include:
- Interest on the HELOC or home equity loan.
- Principal and interest on the rental property mortgage.
- Property taxes.
- Fire insurance.
- Management and vacancy expenses.
Check This Rental Example
If you were to purchase an inexpensive rental property, such as a tiny single-family home located near a university for rental to students, your HELOC might cover the entire purchase price, letting you avoid taking out a mortgage on the rental property. For example, if you bought a small student house for $135,000, your rent would have to exceed these expenses:
- If your HELOC or home equity loan charges 5 percent interest, your monthly interest-only payment is (0.05 / 12 * $135,000), or $563.
- Assume property taxes of $200/month and insurance premiums of $120/month.
- Assume 20 percent of rental income goes to management and vacancy charges.
If we assume the going rental for the single family student home is $1,500 a month, your net monthly income is:
($1,500 – $563 – $200 – $120 – (0.20 x $1,500) = $317.
You could pocket the $317 or use some or all of it to pay down your HELOC.
Consider a Multi-Family Home
If you are willing to take out a mortgage on the rental property, you might consider buying a four-unit multi-family house. The economics might be more favorable because of the following factors:
- You have four rental streams instead of one, which means a higher gross income.
- If a single-family home goes vacant, you have no rental income. If one apartment goes vacant, you still have three rental income streams.
- You benefit from economies of scale on your expenses, including taxes, insurance and management.
In this case, you use your HELOC or home equity loan for the down payment and closing costs on the multi-family property, and a mortgage to finance the rest. In this way, 100 percent of the rental property is financed, meaning you don’t have to shell out a dime to complete the transaction.