With interest rates now higher than 7%, many Americans are shifting their attention to the renters market. As a result, tenant demand is higher than ever. Real estate investors are benefitting as monthly rents are on the rise.
There are more than 44 million rental properties in the United States. This is nearly 1 million higher than in the first quarter of 2020.
This leaves many potential investors wondering if now is the time to get in. Not all investors have cash and may need to consider taking out a mortgage.
Read on to learn all about rental property mortgage rates. Explore topics such as mortgage interest rates and how to make a loan work with your investment property.
Why Do Investors Need a Loan?
There are many different reasons why an investor applies for a mortgage. The first is that they do not have sufficient cash assets to close the deal. They need additional money to pay for the home.
Some investors take out a loan to make renovations. Many investors purchase homes with known issues such as a leaky roof. They use the proceeds from the loan to repair the roof and other significant items before a tenant moves in.
Many real estate investors flip homes as well. They may rent them out for a short time until conditions are right for listing. A short-term mortgage may be utilized in this situation, however, it cuts into the investors' income.
Are Mortgage Interest Rates Different for Rental Properties?
Your interest rate is going to be higher than if you were purchasing a primary residence or second home. This is because lenders view investment properties as a higher risk than residential ones.
Investors are dependent on tenants making timely monthly payments. If a tenant fails to pay, the risk of default is higher. When rental income stops flowing, people are more likely to make mortgage payments to keep a roof over their heads.
What Are the Pros and Cons of Taking Out a Mortgage Loan?
There are both pros and cons to taking out a mortgage for investment properties. One positive is that you can secure a better property.
For starters, lenders typically allow investors to borrow more than they could on a conventional loan. Another benefit is that you do not need to live on the property. Lastly, depreciation and mortgage interest are deductible on your income taxes.
The most significant negative is that financing expenses cut into your rental income. Your interest rate will be higher on a rental property resulting in higher financing expenses. Lastly, the underwriting requirements on an investment mortgage are tighter than a residential property.
Your Guide to Rental Property Mortgage Rates
You are now ready to consider a mortgage to fund your rental property needs. This is a necessary option for investors without the cash assets to meet their needs.
It is important to understand that a mortgage can cut into your income and interest may be higher than expected. If you want to learn more about rental property mortgage rates, contact us today to speak with an expert.