If you’re considering purchasing a property for rental income, there’s no doubt you’ve already asked yourself questions pertinent to the financial risk involved. For example, will the extra income cover the upkeep of the property and the cost of the loan? Will the property’s value increase over time?
But have you also considered existing methods of borrowing that can mitigate financial risk? While the benefits of owning an income-producing property are obvious, the available options that can reduce your risk can be difficult to pin down.
Discover the advantages of an income-producing investment and different ways to maximize its potential.
Property Is a Hot Commodity to Mitigate Financial Risk
A fixed asset, which gradually increases in value over time, can diversify an investment portfolio: It can take it from an equity or one that’s heavy in stock market securities to one that remains stable amid market fluctuations. Investment property is a sensible option in today’s economic climate.
According to Forbes, home prices appreciated beyond expectations in 2016, while mortgage rates were at record lows, hitting 4 percent — which hasn’t happened in two years. Home prices crept higher each month, with a national average increase of more than 5.6 percent.
Moreover, this upward trend in house prices is expected to continue; Redfin predicts that median homes will show a year-on-year gain of 5.3 percent in 2017 compared to 2016, and Zillow predicts that home values will rise 2.6 percent within the next year.
A Steady Income Stream?
Property seekers should determine the average rent in the area they’re looking to buy to ensure it’s sufficient to cover the mortgage payment, taxes, and upkeep expenses. Another factor to consider: What will the neighborhood look like in five or 10 years? Considering all of these factors will help you mitigate the risks associated with purchasing an income property.
If others are investing in the area, your property is likely to increase in value over time. However, if the area isn’t showing signs of recovery or improvement — or property taxes are expected to rise — your property may become more of a liability and less of an income-producing asset.
A Tax Hedge
Investment properties may be an effective income tax hedge if all deductions are taken. Many income-producing properties show a paper loss when all expenses and depreciation are considered, which may offset other income the owner receives.
Also, where taxes are concerned, homeowners can deduct their mortgage interest for loans up to $1 million (or even a portion of their home equity loans).
Landlords, as well as homeowners, can benefit from tax breaks by deducting the mortgage interest they may have paid to buy or fix up their properties. Property owners who refinance homes that have appreciated in value can deduct interest and fees used to improve or maintain the properties.
What Type of Loan Is Best?
Investment property loans are not the same as owner-occupied residence loans. Loans for investment properties are based more on the income and debt service coverage ratio of the property and less on the income and credit score of the borrower.
To receive the best guidance, prospective borrowers should have all their operating cash flow income and expenses prepared in advance before meeting with any potential lender.
That said, there are various ways to finance these types of properties, and a loan professional can suggest the best option:
1. Applying at a local bank where the borrower already has an established borrowing relationship
2. Working with a mortgage broker who has access to several sources of funds for these types of loans
3. Working with a specialty lender who only makes loans on investment properties
The third option is especially advantageous if the property is in another state or location far from the borrower — local lenders typically do not make loans on out-of-state properties.
How Can First Western Federal Savings Bank Help?
First Western Federal Savings Bank specializes in working with investors who are acquiring or refinancing rental properties. Whether an investor is using her after-tax personal funds, a personally funded LLC, retirement funds in a self-directed IRA, or a solo 401(k) as the acquisition entity, we can help.
We lend coast to coast in all 50 states. Our loans are fully amortizing, with no prepayment penalties, and our non recourse loans for self-directed IRAs and 401(k)s boast some of the most competitive rates and terms in the nation.
Contact us or give us a call at 800-908-8845 for more information or to apply for your next investment property loan.