Larry Lapidus


Financing Your First Rental? Expect These Five Things

Investors are increasingly placing residential real estate into their portfolios. With the combination of interest rates being so low for so long, it makes financing more affordable. Couple that with higher rents and you can see why real estate is a solid long term option. If you’re getting ready to get your financial toes wet with a rental property, here are five things to expect:


Lenders view non-occupied properties as a greater risk than a primary residence. The thinking is that if someone who owns multiple pieces of property and gets into some financial trouble the borrowers will sell or let their rental properties go into foreclosure before they would abandon their own home. To offset this risk, you can expect higher rates. Not a lot higher but higher, nonetheless. You can expect a non-owner occupied fixed rate to be anywhere from 0.50 to 1.00 percent higher.


The two primary drivers of real estate investing are long term appreciation and monthly cash flow. Name one other asset class that does that. You can’t. Property will appreciate over time but at the same time there’s a check in your mailbox each month. When investors evaluate a potential purchase, if the income from the unit isn’t enough to cover the expenses of owning much less providing extra income, it’s probably not going to be picked up.

Being a Landlord.

Potential first time investors can start their own search online to check out the market. They see a home listed for sale and also note the home brings in $2,000 per month in rent. After a couple of calculations, they discover that not only is the $2,000 enough to cover the mortgage payment, insurance, taxes and maintenance, there’s an extra $500 left over. That’s profit. The rent pays for the mortgage. But, the lender won’t let you use that rent to qualify as income. Why? Lenders want to see real estate investors be real estate investors for at least two years. Until that point, the buyers must qualify without the benefit of the rental income.

Nobody’s Home.

Okay, so now you’ve owned your rental for a couple of years and can indeed use that income to help qualify for yet another purchase. On the loan application you’ll enter the net rental income from the unit. The appraiser will also make note. However, the lender will discount that amount by 25 percent. Instead of $2,000 per month, qualifying income is now $1,500. Why? Lenders consider a vacancy factor assuming that at some point the unit will be vacant when one tenant leaves and a new tenant has yet to arrive.

Down Payment.

Circling back to additional risk, in addition to higher rates you’ll need a larger down payment compared to an owner occupied property. You can expect to make a down payment of 20 percent for a conventional loan and you can get slightly better terms with a 25 percent down payment.


And here’s your bonus tip at no extra charge. Conventional loans will be your option as well as maybe a few portfolio options. But government-backed programs such as VA, FHA and USDA programs are reserved for those intending to occupy the property. Your loan officer will provide an array of options to finance your first rental.

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