Rental house, cash-flows over principal pay off?

[kv968]

When I told my friend I wanted to buy a rental and he suggested that, he just put it in unique perspective. "if you plan on selling the house at a profit in 5-10 years, whats the point of having the money in equity instead of just having the principal you would have paid in an account?". That idea sounded kinda unique.

That idea sounds unique?!? Ask all the people caught holding houses when they were trying to flip them in '07 and '08. It sounded unique" to them too

[chrisburke21]

This type of loan is usually an adjustable rate mortgage. If so this would not be a good idea since interest rates are at historical lows. Why not do a usually conforming loan? It will take some time before your rental property is to become profitable... depending on what you spend and what you can rent the property for.

[Goldy1]

My parents inherited a couple rental hmes. I could tell ya stories. One guy sprayed the house with red paint on his way out after his last month. No reason. Constant issues. They finally sold one.

[LMA]

My parents inherited a couple rental hmes. I could tell ya stories. One guy sprayed the house with red paint on his way out after his last month. No reason. Constant issues. They finally sold one.

When you are on the outside looking in these are the types of stories you always hear about landlording. And I am sure this was your parents experience, I am not denying that. My point is that you hear very few stories about landlording where things go well.

From someone who has owned two rentals going on about 4 years now I can tell you that I have never had any regrettable experience (knock on wood). I have good, responsible tenants and they have taken care of the house and I have taken care of them. Of course, stuff breaks because after all its a house, but the overall experience has been positive. Every now and then I have to deal with a repair or a late payment but other times 6 months go by where the only work I do is go pick up the check at the post office.

[TBH]

This is super helpful. I'm thinking about buying a rental property and one of the things I have been worried about is the loan. Interest rates for investment properties usually carry higher interest than those for primary homes, right? And if you don't have it rented yet, you have to qualify for the loan based on your income (and taking an existing primary home mortgage into account)?

[LMA]

This is super helpful. I'm thinking about buying a rental property and one of the things I have been worried about is the loan. Interest rates for investment properties usually carry higher interest than those for primary homes, right? And if you don't have it rented yet, you have to qualify for the loan based on your income (and taking an existing primary home mortgage into account)?

Yes, interest rates on loan for investment property are usually higher but still, with how low rates are right now I can get about a 5% rate which was unheard of just a couple of years ago. You are also correct on the qualification as far as I understand it. And if the house were to be rented most lenders will only consider about 75% of the income from the property. You will also be required to show that you have reserves equivalent to 6 months of mortgage payment and probably will need between 10-20% down payment.

[TBH]

Do you need a special mortgage broker for this, or can any mortgage officer sell a loan for an investment property?

[LMA]

Pretty much anyone can do this whether mortgage brokers or mortgage lenders.

[dws123]

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[UnknownXV]

I told him when he goes back to work on monday I told him to ask around at his office so I can get more details.

The whole reason I'm interested in this alternate loan would be for the bonus in cashflows. By lowering the monthly I would have more cash in my hand than instead going towards principal in the house. Then after the house's value goes up from anywhere from 10-50% I would sell at the market price that would be above the loan. Granted I would only get the difference from the sale, and not the equity I put into the house.

Using a fixed loan would be acceptable but it would just lower my cash flows a month by X (the difference in the interest only loan/normal fixed). Basically just holding ownership of the house until it gains in value. And I would not be as interested in this house if I wasn't fairly certain it was dramatically undervalued.

Do not forget about property taxes, and other assorted taxes associated with receiving rental income. Dealing with the government red tape and taxes is probably the most annoying thing to deal with. After that, you are also responsible to make sure the house is up to par, so you'd have to budget in for repairs as well, as well as background checks, credit checks, and verifying their references until you find a good tenant. And if a bad tenant slips through, the law is on their side, not the landlord, especially if they've lived there for a while.

Just keep that in mind.. I think it could work, but it's far from a guarantee.