The pros of buying your first rental property.

• No private mortgage insurance required
• Tax benefits
• Rental income
• Diversifies your assets

No private mortgage insurance required

Most loans for a primary residence (the house you live in most of the time) will require you to pay some kind of mortgage insurance. This is insurance that protects your lender if you default on your payments. You won’t have to pay private mortgage insurance on your rental property, so that’s one less monthly fee to worry about. You may still want to invest in landlord insurance, though.

Tax benefits

Remember how your home loan for your primary residence qualified you for write-offs? There’s more where that came from. Buying a rental property could qualify you for tax deductions like:

• Mortgage interest: Mortgage interest is considered a business expense for your rental property, so you can deduct it using your Form 1098. You should receive this from your lender at the beginning of the year.
• Property taxes: The property taxes for your rental property will depend on its location and how much the home is worth. To deduct property taxes, you’ll use Schedule E (Form 1040).
• Depreciation: Like a car or computer, your rental property loses value each year as it accumulates more wear, tear, and general aging. This could actually work to your advantage, though, because you can deduct that depreciation on your tax return. You’ll use Form 4562 for this deduction.

You may not qualify for every possible write-off, but some other potential tax benefits include deductions for repairs, transportation expenses, and advertising costs. Filing can be a little more complicated than it would be for your primary residence, so it may be helpful to consult a tax professional rather than filing on your own.

Rental income

This perk is one of the obvious reasons that many homeowners decide to buy their first rental property. Rent is currently rising, which means you could enjoy a significant boost to that monthly rental income depending on where your property is located. Just don’t let all that power go to your head.

Diversifies your assets

Having a variety of assets to your name is a fundamental investment strategy, and buying your first rental property is a great way to diversify. Since you have more control over it, can sell it when you’re ready to move on, and its value rises with the market, a rental property can be one of the less risky ways to invest. Speaking of risk, let’s explore the cons of buying a rental property.

The cons of buying your first rental property.

• Higher interest rates
• Higher down payment
• It can take a while to see a return
• Risk of unreliable tenants

Higher interest rates

Because your lender is taking a bigger risk in financing your investment property than they would be for your primary residence, you can typically expect higher interest rates on your rental property’s mortgage.

Higher down payment

Depending on the type of loan you choose for your primary residence, you could put down as little as 3%. In fact, VA and USDA loans require no down payment at all. For investment properties, on the other hand, you’ll need to put down at least 15-20%.

It can take a while to see a return

If you’re looking to get rich quick, a rental property is not the way to do it. In addition to closing costs, you may also have to put in more money up front for home upgrades like fresh paint, new appliances, and updated landscaping to make your property appealing to renters. And, you may not fill your vacancy right away. It could be weeks or even months before you find tenants and start receiving steady rental income.

Risk of unreliable tenants

We believe everyone deserves a place to call home—but that doesn’t mean every tenant will make your job a breeze. If you’re not sure you can handle the awkwardness of following up on missing rent payments, addressing maintenance issues, and generally taking responsibility for the state of your rental property, being a landlord might not be for you. And before you get too frustrated with your renters, just keep in mind that we’ve all made a landlord’s life a little harder at some point.

What to look for in your first rental property and what to avoid.

Choosing the right rental home can make all the difference in the return you enjoy down the line. Here are some dos and don’ts to keep in mind when you start your investment home search.

Do:

• Make location a priority. Are there restaurants and shops nearby? What’s the crime rate in the area? Make sure the property is in a location that will attract renters.
• Avoid fixer-uppers. The more you have to fix, the longer you’ll have to wait to take on tenants and see a return on your investment.
• Research the local housing market. To make sure you offer a fair rent and pay fair rates for your mortgage, do your research and know what to expect from the market. A real estate agent will know all the ins and outs of the local area, so you may want to consider working with one for your investment home purchase.

Don’t:

• Start with a large property. Smaller residences like condos and single-family homes are less work and less risk for your first time around.
• Invest without another source of income. It might take a while to profit from your rental property, and it’s true what they say: You have to spend money to make money. Be sure to have an adequate cash flow available before committing to that landlord life.
• Try to do everything yourself. From your real estate agent to your tax consultant to your loan team (hey, we know a good one), there are a lot of specialized professions involved in buying a rental property. You could do it all by yourself, but you may miss out on opportunities to save or make money that an expert would catch.

So, now you know the basics of buying your first rental property. When you’re ready to get started, our team is here to help. In the meantime, happy house hunting.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

Buying your first rental property can be complicated, but it’s a lot easier when you know what to look for. Hint: Location, location, location.

The post Buying Your First Rental Property? Here’s What You Need to Know appeared first on Cardinal Financial.

We are not providing tax, financial, or legal advice in this blog post. The difference between an investment property and a second home lies ultimately in the IRS Code.

Investment property, rental property, second home, vacation home… After a while, these housing industry terms seem to blend. In reality, these terms are actually quite different, both in what they describe and the mortgage rules that apply to them. Searching for some clarity on the matter? This article should help. To find out how an investment property mortgage is different from a second home mortgage, we first need to explain how the properties themselves are different.

Investment property

Let’s talk about investment properties. Many people also call these “rental” properties, and for good reason. These homeowners make side income by renting out their investment property to tourists and vacationers (possibly even using services like Airbnb) or to more long-term guests like residents who pay rent. This kind of homeowner, however, does not live in their investment property—they have a different primary residence. Purchasing an investment property can be an attractive and rewarding investment for many reasons. For one, it helps diversify your investment portfolio—and for those who are into investing, you know that’s a good thing. The money you make from renting your investment property can also be used as payment toward the home’s mortgage, especially if it’s steady rental income from a resident. Now that’s a return on your investment.

But, be warned, investment properties are not the easiest to manage. It can be hard work—particularly if you’re housing a renter. At that point, you’re not just property owner, you’re also landlord and maintenance. Unlike renters, stocks and mutual funds don’t pay rent a week late, irreversibly scratch your hardwood floor, or call you about plumbing issues in the middle of the night. It can be exhausting—not to mention expensive. You’ve probably heard the phrase “It takes money to make money.” Well, that’s true for investment properties. You think renting out your investment property is going to be an instant cash cow, but for a while, in the beginning, it could cost you a lot of money. Don’t forget this property will have a mortgage, taxes and insurance, and utility bills just like your primary residence. As with most financial decisions, there are many pros and cons. Always consult a professional financial advisor and/or legal counsel for guidance before you buy an investment property.

Second home

For some homeowners, their second home is their vacation home (or, as we say in the mortgage industry, their non-primary residence). Think of a second home as the place where you live during certain times of the year, like on the weekends, during the summer, six months out of the year, etc. This could be a beach house or a cabin in the woods. Some of these properties are in second home “communities” where most of the properties in the surrounding area are second homes. This is a different kind of investment—you may not rent it out (although you can), but more likely, you, your family, and your friends reap the benefits of an extra property that’s all yours.

And again, owning a second home requires work and comes with more bills to pay. It’s more responsibility and more property to manage. You have to clean it, maintain it, and ensure its year-round safety and security. Like an investment property, buying a second home is a big decision that demands preliminary legal advice.

Investment property mortgage vs. second home mortgage

Now that we’ve covered the differences between these two types of properties, let’s address the differences between an investment property mortgage and a second home mortgage.

An investment property mortgage is what we call a business purpose loan—a loan for a non-owner occupied rental property. Mortgages for investment properties tend to come with higher interest rates and often require larger down payments. These two factors are designed to protect the lender in the event that the borrower fails to pay their investment property mortgage. Most lenders consider these types of home loans to be riskier simply because, since the home buyer doesn’t live in this home, they might be more inclined to walk away in the event of financial adversity. Lenders believe that a borrower who has invested quite a bit of their own hard-earned money into their property upfront will be more likely to keep the property—and continue paying the mortgage—even in financial crisis.

You think renting out your investment property is going to be an instant cash cow, but for a while, in the beginning, it could cost you a lot of money.

A second home mortgage is different in that you’re more likely to see interest rates and down payment requirements similar to that of a primary residence. If you plan on living at this property for at least 14 days out of the year, it’s considered a second home, and would need a second home mortgage.

We know what you’re thinking. Why not apply for a second home mortgage, use it to buy an investment property, and reap the benefits of a lower interest rate and down payment? Think again. Lenders are smart and their staff is trained to notice this sort of activity. It’s called mortgage fraud and, if you’re caught, you could face some serious fines. Since living at the property for at least 14 days out of the year is the deciding factor between an investment property and a second home, it’s one of the first things underwriters look at when assessing the loan. Take it from us—honesty is the best policy.

We’re always working to provide you with information that can help you make educated homeownership decisions. Did you learn something new by reading this article? Share your thoughts with us on social media!

The post The Difference Between an Investment Property Mortgage and a Second Home Mortgage appeared first on Cardinal Financial.