Becoming a landlord can potentially be a smart investment, especially in our current national climate. The number of Americans who rent their homes is at an all-time high, according to the National Multifamily Housing Council and the National Apartment Association. But the current supply of apartments and rental homes isn’t keeping up with the demand.
When the process goes well, buying a rental property can generate a passive income stream that can help you now and in retirement. A rental property may also diversify your investment portfolio and create an asset that grows in value over time.
Yet even if you find the perfect investment opportunity, securing a rental property loan can sometimes be a challenge. Thankfully, you have options. Below we’ll cover a few of the most common types of investment property loans along with insights into how they work.
The Difference Between Rental Property Loans and Conventional Home Loans
If you’ve taken out a mortgage for your primary residence in the past, you’ll find similarities in the process whenever you try to finance a non-owner occupied property. With an investment loan, you’ll still need to fill out an application, verify your income and assets, and the lender will check your credit reports and scores.
But there are also some key differences you may experience when you apply for your first rental property loan.
1. Lenders are more stringent.
Loans for investment properties are inherently more risky for lenders than standard, owner-occupied mortgages. The probability of late payments and default on rental property loans are higher. When money gets tight, real estate investment loans usually aren’t at the top of someone’s priority list.
Imagine the following scenario. You’re a homeowner, and you owe the bank a mortgage on your primary residence. You also own a rental home, and you owe a mortgage on that property as well.
Now, imagine something changes in your financial picture. Your income decreases and your tenant stops making his rent payments on time. All of a sudden, you can’t afford to make the mortgage payments on both your primary residence and your rental property. So which mortgage do you choose to keep current? Many people will choose their primary residence.