or 20% or more to avoid paying private mortgage insurance (PMI). The primary lenders for these types of mortgages are commercial banks, thrifts and mortgage bankers.
If you’re an absentee landlord with a property of five or more units, however, the dwelling is considered investment property. Typically, these are highly leveraged purchases. Investors do not have the options regarding interest rates, terms or down payment that are available to occupying home buyers. Lenders usually require down payments of 20%-30%. The reason for demanding astronomical rates and down payments: rental property carries huge risks.
"Usually people will sacrifice everything before allowing their primary residence to be foreclosed. That’s the last thing they sell," explains Frank Gooden, president of First Merchants, a Brooklyn, New York-based mortgage bank. "Investors, however, may walk away from a troubled property more easily."
Because of the risk factor, most banks will not give you financing if you own more than five investment properties with secondary market loans (those that are sold to other institutions). Once you own more than five properties, you have to arrange some other type of financing — or a commercial loan, where the typical down payment is at least 25%-30%. Larry Lick, owner of 24 rental buildings and founder of Rental Housing On Line (www.rental-housing.com), a resource for small real estate investors, suggests developing a relationship with a local banker who won’t sell the mortgage on the secondary market and, therefore, isn’t restricted by the five-dwelling limit. One caveat: these deals will probably be adjustable-rate mortgages (ARMs). Most investors clamor for fixed-rate mortgages so their costs won’t vary in today’s interest-rate-sensitive environment. "If you’re paying 8% and the market changes, then you adjust to 10% — you can’t just raise your rent to cover that,
" explains Gooden. "You’ll only be able to raise rent a moderate amount on an annual basis."
Other options include government loans. Curtis White bought his first home with a conventional loan from a savings and loan, but he financed and rehabilitated his other homes through the Department of Housing and Urban Development’s 203(k) program. Check out the HUD Website at www.hud.gov for more information on HUD programs.
HOW TO HANDLE TAXES AND INSURANCE
Financing isn’t the only thing you’ll pay more for when you own rental property. Insurance costs are higher, too. If you own a rental property worth $100,000, you’ll pay about 15%-20% more than if you lived in the home. Insurers are wary of the increased liability of rentals because the owner doesn’t have exclusive control over the property. "The [renter] makes the coverage go up," explains Madelyn Flannagan, director of research and information for Independent Insurance Agents of America (www.iiaa.iix.com), a trade group in Alexandria, Virginia. "As a result, insurance companies tend to be more careful in requiring the upkeep of the home — like requiring that broken sidewalks be fixed or pools drained."
Just like any business that obtains insurance coverage for potential hazards, consider policies that cover