Updated November 10, 2020
A rental property is a long-term investment that — when managed well — can become a reliable source of rental income. Unless you're paying for the rental property in cash, you will need to secure a loan to purchase the property. Gathering documentation of your finances and collecting information about the property you want to purchase can simplify the loan approval process and put you one step closer to purchasing a rental property.
3 Things You Need Before Applying for a Loan for Your Rental?
1) Financial Documentation
A potential lender will need to confirm you've capable of taking on the expenses of a rental property, even when the unit is unoccupied, and you're paying the monthly mortgage. Collecting basic data gives the lender a good sense of your financial outlook.
- Credit report: Request a copy of your credit report, and review it line by line to ensure it is accurate. Contest any problems. Remember that the higher the credit score, the more attractive you are to lenders, so do your best to shore up any outstanding credit issues before applying for a loan.
- Bank statements: Pull together recent bank statements so the lender can see how much cash you have available every month; you'll need to show how much money you have on hand for a down payment as well. Depending on the loan you choose, you will need to put down anywhere from 10 to 20 percent at closing.
2) Due Diligence
Before you apply for a loan, you will need to investigate the rental market and the property's viability as a rental unit. During this investigation, collect the following information:
- Rent rolls: If you purchase an existing rental property, know that rent rolls reveal how much money is currently being collected for rent when current leases expire and which units are vacant. This information tells the lender how viable the property is as a rental unit.
- Income and expense statement: Ask the current rental property owner to share 12 to 24 months of income and expense statements; this piece of information also helps determine the financial success of the rental property.
3) Property Details
Before you apply for a loan on a rental unit, you want to ensure the property is well maintained, has no outstanding issues, and does not face any substantial cost increases in the future. Collecting these details will show the lender this property is a smart investment.
- Inspection: Conduct a thorough inspection of the rental property, looking for significant problems that may require fixing or replacing. Focus on existing signs of damage, the roof, HVAC unit, plumbing condition, and the condition of finishes such as exterior and interior walls, driveway, sidewalks, and flooring.
- Utility costs: Review past utility expenses for the rental property, considering those expenses you will be responsible for and those that tenants will cover. Contact the local utilities to ask about any upcoming rate increases, which will impact your rental income totals.
- Insurance: Secure a quote for insurance for the rental property. Your lender will want to know how much this insurance will cost, and you'll need to factor this amount, and all taxes, into your financial picture to provide a grasp of how much the rental property will cost you.
Due diligence and a proactive approach to your rental investment can help you secure a loan. Thoroughly understanding the financial implications of the investment, as well as the anticipated expenses and upkeep, helps you and your lender determine whether this purchase is right for your future.
Source: This article was published with permission from LandlordStation.com