How to Buy a House As an Investment

A rental home should suit your tenant's needs.

A rental home should suit your tenant's needs.

Buying an investment home is a very different process from buying a personal residence. The home you purchase might be different from the one you live in, since you're looking to satisfy tenants' needs rather than your own. You'll also need to put more money down in most cases, since lenders treat investment properties differently from personal residences. Finally, the entire qualification process for your loan will be different because the lender looks both at your ability to make the loan payments and at the property's ability to support them.

Hire a real estate agent that specializes in working with people that buy investment homes. They should have access to market information that will be useful to you. Some will also have relationships with lenders and portfolio owners and may be able to give you access to good rental homes before they are formally listed on the market.

Save money for a down payment and put it in an account where you can get to it quickly, like a savings, checking or money market account. Rental property lenders almost always require a down payment of at least 20 percent, and many require more. You might even need to set aside an additional separate fund for "reserves." Lender reserve requirements vary, but you could need to have at least six months' worth of principal, interest, tax and insurance payments saved in addition to your down payment. If you cannot save money for a down payment, you might be able to buy a house with little or no money down by finding one where the owner will finance you. Doing this will usually limit the number of properties that you have to choose from.

Research rent levels in the market in which you intend to buy. Your real estate agent should be able to provide you with this information. Other sources of information include Craigslist, where you can see where other houses are renting, for-rent listings from local property management companies, other landlords and the city government department that tracks the rental market. You will need to project your rental income accurately to ensure that you can make enough money from the house that you buy to cover all of your bills and earn profit.

Find a lender that will work with you. Many lenders will pre-approve you and issue a letter stating that you have funds to close. Attaching that letter along with a letter from your bank that shows that you have the down payment funds available will make your offers more credible and increase the chance that you are able to put a suitable property under contract.

Tour properties to find suitable rentals. Generally speaking, you want to find reasonably sized properties with reasonable quality amenities and appointments. Paying extra for a house with elaborate features doesn't make sense if you can't collect rent for it.

Write an offer on a house at an appropriate price. To find a price, start with the monthly rent that you can collect and multiply it by 11 to find your annual rent, less a one-month vacancy factor. Subtract your property taxes, property insurance, utilities, services or repairs that you will provide for the tenant, and your management fees to find your net operating income. Set your price so that your net operating income will cover your principal and interest payment and leave you a little bit extra for profit. While a 10 percent annual return relative to your down payment is a good goal, your agent can advise you on what is customary in your market.

Inspect the property with a professional inspector to ensure that it is in good condition. If necessary, order pest reports, flood reports or earthquake reports as well.

Obtain a loan from the lender that pre-approved you. Typically, you will need to make a good faith deposit, fill out a formal application and retain an appraiser who will both look at the property's condition and prepare an analysis of the property's income potential. If the property will not generate enough income to support the loan, the lender will probably refuse to lend to you.

Close the transaction. Make sure that your down payment and loan funds are in the closer's possession prior to the closing so that the property can be transferred on time.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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