With the great prices on real estate currently, many novices are entering the business in the hopes of becoming the next tycoon. But purchasing a rental property or investment property of any kind, is not quite the same as purchasing a home that you will be living in. There are a few important numbers that you need to be aware of before you make your investment.
If you are purchasing a property to live in and applying for a mortgage, lenders would like to see a debt to income ratio of 36%. For the housing portion, lenders would like to see your gross income to housing payment at about 28 to 33%. For an investment property guidelines recommend that your maximum debt to income ratio be at 45%.
When you purchase a home for your personal residence, you are often able to secure a mortgage with a down payment of as little as 3.5% for an FHA loan. But the down payment on an investment property is much different. Typically a 20 to 25% down payment is required and sometimes it can be as much as 40%. The lender will use many factors to determine the amount that they will require for the down payment, including your debt to income ratio, your credit score, the property price and even the likely rental per month.
If you are planning on not being required to show additional income because the rent covers your monthly mortgage, then you will need to be able to show a two year history of managing properties and purchase rent loss insurance. If you cannot document previous property management experience then you will need to show the lender that you have the income necessary to cover the monthly mortgage payments without using the rental income.
You also need to consider the price to income ratio and the price to rent ratio. Price to income is a comparison of the median household price in the area to the median income in the area. The price to rent ratio comparison is derived by dividing the median household price by the annual rent. In early 2006 the number was 18.46 but dropped to 11.34 by the end of 2010 after the real estate bubble burst. A good rule to follow is that a rent ratio over 20 is a good investment and you should seriously consider making the purchase.
You will also want to verify that there will be good cash flow from the property. If you are covering the mortgage principle, the interest, taxes, and insurance costs with the monthly rent then you are in a great spot. You will want to be sure that you are building a cash reserve to use in the event of a needed repair or if you have a long term vacancy and need to cover the monthly expenses. There is more to investing in real estate than just thinking that you will be approved for the loan. Visit www.azrealestatewholesale.com to talk to the real estate investment professionals about all of the facets of the business. With a clear understanding of the scope of work and the processes in the industry, you will have the ability to decide if you are ready to become an investor and a landlord in the state of Arizona.