Last Thursday the first installment in the becoming a landlord series hit your internet shelves. I tackled some of the prep work you are going to need to do if you are considering getting into the landlord game, and, how you should really think long and hard about whether this is even a game you want to play. I promised that this week I would teach you how to get your first rental property without a hefty 20% down payment. So here we go:
Rent out the home you live in
Yeah, it is that simple, and no, I’m not asking you to pitch a tent somewhere and live off the land – cause where would your tenant send the check? You’ll obviously want to find another living situation. There are a LOT of benefits to renting out a home you’ve been living in as opposed to starting fresh with an investment property you haven’t dwelled in before, like….
You know the home. I went the non-traditional way to becoming a landlord. I decided to rent out the home that I had been living in for the past 3 years. That gave me time to gussy up the ol’ bird without using precious “rent-time” -the time you spend fixing up the home while paying your mortgage. No tenant while you fix things up = lots of money out the door.
Another plus is that when the tenant has an issue it isn’t foreign to me. I know some of the things that are going on in the house because of the time spent tinkering with this and that. Living there for at least a year gives you that insider knowledge and its kind of like starting the rental game from first base as opposed to the on deck circle. AND, if you’ll live there it is likely someone else will find it habitable too. Who wants to rent out a place they wouldn’t live in? Not me. That is just a recipe for trouble.
Less down payment required. Because you won’t be looking for investment loans you will be able to purchase your new place with less money down. A lot less. You can get an FHA loan with only 3.5% out of pocket for your new living quarters. I actually still recommend that you have 20% to put down in most cases to avoid that pesky PMI and because it provides substantial equity from day one. However, FHA loans are not a bad option, especially if your current home will net you good cash flow.
Lower interest rate. You’ll benefit from a much lower interest rate if you rent out your prior home as well. That means a lower monthly payment, substantially less money that you owe over the life of your new loan, and more monthly income. Now that you are looking at primary residences your rate will often be close to a full point lower. That’s huge!
Another tip if you are getting really excited about this prospect but your down payment is still a bit shabby is to check out homepath and homesteps. These are Fannie Mae and Freddie Mac’s foreclosure websites. Through these sites you can purchase a home with as little as 3% down and still avoid PMI, although their loans carry slightly higher rates.
Since I just purchased a home the traditional way 6 months ago with 20% down this is now the route I’m looking at for my next purchase. I feel comfortable making another home purchase with less skin in the game now because of the large amount of equity in my first two properties. By the way, the foreclosure market can be competitive and the pickings are usually slim. You’ll need to be ready to pounce when a deal catches your eye.
So if you are interested in the landlord game but don’t have 20% in cash to throw down, consider moving and renting out your current pad. Live in it before you leap into renting it out – I believe that is the easiest and smartest way to start out.
2 Comment responses
But remember, if you ever sell, you have to live in it 2 of the last five years to avoid tax on the sale of the property.
Good call Money wom. Thanks for that piece of advice.