Frequently Asked Questions About Investment Properties
Question: If I’m the landlord, doesn’t that mean I’d be responsible to repair broken things on the house?
Answer: Yes in many cases. Setting up the leases carefully can alleviate some of these challenges. But most investors I work with allot 10% of the rent for these expenses. FNMA defaults to 25% of the rents for expenses. If you’re collecting $2000/mo in rents, you’d have $500/mo for repairs, vacancies and all the other expenses.
Question: How many rentals can I finance?
Answer: 4 financed keeps you in the main stream. We can go to 10 with minor modification to the qualifications. And we can go to 11+ in certain situations. Reserves are the key change as you finance more and more properties.
Question: How much do I need in reserves?
Answer: First, let’s define Reserve. That just means savings. Formerly, the mortgage industry measured reserves by the number of months that you can make your house payments. But FNMA (FannieMae) changed their rules in 2016 to be based off the Unpaid Principal Balance (UPB). 1-4 properties financed and you’ll typically need 2% of the UPB in reserves. That means if you owed $200k on each property and you had 4 of them, then you’d need 2% of $800k or $16k in savings after closing. 5-6 financed properties require 4% of the UPB and 6% of the UPB if you’re 7-10 properties financed. Reserves can still also be measured by number of months of payments with other investors besides FNMA. Six months of all payments tends to be the most required. If you had 4 financed properties (the same example as above) and your payments were $1200/each. If you needed 6 months of reserves for each property, you’d need $28,800 in savings after closing.
Question: $100/mo isn’t significant income, why would I spend that much for a down payment for only $100/mo?
Answer: I’m not a financial planner, so I can only answer this as a mortgage loan officer and the observations I’ve made by watching my clients and in my own investments. The amount is slightly irrelevant. But the investors I work with look at the cash flow and use that to calculate a capitalization rate. $100/mo would be $1200/year. They then divide that by the amount down. Let’s say it was $30,000. $1200/$30k would be a cap rate of 4%. This would be the amount you’d essentially compare to returns you’d get in other investments. But due to my licenses, I can’t speak much more to that. Ask questions if you have more on this. But again, investors I work with don’t worry as much about the amount each month as they do that it’s sustainable AND the long term play. Remember you’re paying off a mortgage with your monthly costs. It will eventually payoff and then you’re making much more than $100/mo. Also, real estate tends to increase in price over the years earning you additional profits potentially above that cap rate and rents tend to rise long term as well. For more details about the validity of this investment, be sure to consult a financial planner.
Question: How does it affect my taxes, owning real estate?
Answer: I’m not a tax planner, so I can’t say much except by observation. But I can say that I don’t see any advantage to leaving it off your taxes. Showing the rents, but not the expenses would likely increase your taxes. Showing your expenses, but not your rents would be tax fraud and would hurt your ability to get future loans from me. So I’d simply encourage you to get a tax planner to help you and file it the way it really is.
Question: Being a landlord is such a hassle. Why would I want to mess with that?
Answer: Haha maybe you don’t! :) But I’d say 1st reason would be, to be able to leverage a larger asset. $30k down leverages $200k of asset. The $200k may grow by 5%. That’s $10k. But you only invested $30k, thus returns are large on your actual investment. Make sense? 2nd reason would be that you can involve a property manager if the hassle is too great. But watch it. Sometimes they really do their job poorly and increase your expenses a lot. 3rd, what else can you do that locks down a near permanent, somewhat passive, inflation adjusted source of income? Of course, for more info about creating future income, other investment options, etc, consult a financial planner. But for details on how to borrow money for investment property, consult me. :)