Buying a rental home: Consider these costs before getting a mortgage

When looking around in the local housing market for a suitable rental home, there is much to consider. However, before you ink a deal, it is recommended that you calculate the costs associated with buying a rental property before getting a mortgage to understand whether it will be a money pit or a windfall.

Rental costs to consider before applying for a mortgage

If you’ve been wondering ‘How much can I afford’, then you need to take the following costs into account before taking out a mortgage to buy a rental home:

• Property taxes – Based on the location of your rental property, taxes on it may increase your home ownership costs significantly. In this case, it is advisable that you get in touch with the concerned local municipality officials to verify whether or not the taxes that have been listed on the Multiple Listing Service are authentic. Moreover, you should find out the kind of services that you are getting out of paying those taxes. Say for instance, tax levied for garbage removal or municipal tax on potable water supply.
• Mortgage qualification – Being a kind of investment, any rental property will always be considered riskier since you won’t be using it as your primary home of residence. So, you may have to pay around 1.5 percent extra than the mortgage rates that you’ve seen on the advertisements. Additionally, the down payment that you are required to pay for a fixed and an adjustable 1-unit property would be around 15% and 25%, respectively.However, if you want to buy 2-4 unit homes, then that same down payment amount will increase to 25% and 35%, respectively. On the other hand, if you don’t have an impressive credit rating and that your credit score is below 720, then you may have to pay even more.
• Maintenance – You need to keep a pool of cash reserved every month so that you can use that money to pay for any sort of repair work to keep your rental property in a proper condition.Moreover, it is good to devote around 10-15% of your yearly annual rental income for the repair and development of investment properties. This combined with the security deposits paid by tenants can be used to repair a damage caused by the occupants themselves.
• Homeowners insurance – Property management companies warn rental property owners like you of the insurance cost that can add up to your monthly financial burden. This will be decided on the basis of the region in which you are residing.The cost of this insurance will be a lot higher, if you happen to own a rental home that is located in a flood-prone area or a region that is too vulnerable to fires or any natural calamity. Therefore, you should discuss the coverage rates with the representative of an insurance company before signing on the dotted line.

Furthermore, there are some selected condominiums and property owner’s associations that levy a monthly fees on their members. This you must include while preparing your budget. You must also find out that there are no rules against rental properties, in case your home is not part of any such associations.