Before looking at properties, determine first what the current market rents are for the property type you have in mind in your area.
An experienced real estate agent or property appraiser should be able to tell you this.
You can then determine what your net income on the property would be each month (also remember the tax benefits, if any) after factoring in regular and unforeseen maintenance expenses.
Determine also your long-term strategy for owning the property.
Will you be willing or able to break even, or potentially take a loss on the property each month, anticipating a high sales price in the future? Will you be able to hold the property during times of declining property values, as we are experiencing now?
Getting a Mortgage
Mortgage lenders will typically charge a higher interest rate (one or more percent) on an investment property than they would on a property that a borrower will live in.
This is partly due to the fact that both renters and the rental market itself can be unpredictable.
In calculating their risk, things that lenders look at when considering to lend on a rental property are:
- How much money will the borrower be putting down? Typically lenders want between 10% and 25% (for first time investors) to show the borrower has a vested interest in the property and wants to make it work.
- Landlord experience: How long has the borrower been managing rental properties, if at all?
- Income and assets: Will the borrower have enough money in the bank to cover the mortgage, taxes, and other expenses if the property is vacant for an extended period? Typically lenders want six months in reserves.