A mortgage on a rental or investment property is often looked at as being the same as buying a second home.
Mortgage applicants, brokers, and lenders all know there is a difference between owning a second home and a rental property; you do not intend to live in the home yourself, so why would it be considered a second home?
The answer is because your financial situation needs to represent what you can finance without the possible income stream of the yet-to-be-purchased home. You cannot use a hypothetical income stream to secure said income stream.
So, what kind of mortgage financing can work?
Second Home Mortgage.
Buying a second home needs to fit within your current financial situation. Your mortgage broker will go over your existing mortgage and other assets to determine how affordable that large of a purchase will be. Financing a second home mortgage can be within reach if your existing mortgage is in good standing and your income shows you can sustain another mortgage. You can rent out your second home to earn income, but you also often have to live in the second home for a percentage of the year, depending on the laws in your area. Learn more about Vacation and Secondary Homes here.
This type of mortgage makes sense if you do not ever intend to live in the property yourself. An investment mortgage comes with its own set of requirements you’ll have to meet in order to prove financing is in place, including supplying a 20% down payment in order to qualify for a 30 year amortization period.Mortgage interest rates are a bit higher for this type of home loan. Mortgage lenders often see greater risk with investment properties. With the proper financing in place though, mortgage lenders also see this as a viable long-term property investment. They know the benefit of assisting you in securing an investment mortgage. Mortgage lenders know that investment properties are often successful at producing a secure income stream, which a homeowner can use to pay off their first mortgage. In short, if an Investment Mortgage makes sense and is within your reach, your mortgage lender will be happy to enter into the agreement with you.
This is where a professional mortgage broker can provide some real help. If you have other assets including value from your first home, purchasing your rental property outright can sometimes be within your reach without you even knowing. Owning the property outright without needing to ever qualify or lock in a mortgage can save you thousands.
Third-Party Private Lenders.
Private lenders are often not governed by institutional regulations and the provisions of the professional mortgage market. As such, they often ask for heftier down payments, higher interest rates, and shorter amortization periods in exchange for taking on a higher risk financing agreement. Loan providers of this sort can sometimes institute a clause to recall the loan at renewal time instead of reinstating the agreement as you may expect.
What About Airbnb
or Short-Term Rentals?
Steady, but also highly variable, the income from purchasing a rental or investment property for the purpose of starting an Airbnb is considered a higher risk for mortgage lenders. New bylaws and regulations have made starting and running an Airbnb more difficult in recent years.
As with buying a second home, you’ll need to show that taking on the mortgage payments and amortization period will both fit within your current financial situation. Essentially, buying a property for short-term rental is the same as buying a second home and the potential earnings on the property do not factor into what the mortgage lender considers to be a high-risk loan. For these reasons, securing a mortgage on a property to run an Airbnb or short-term rental is extremely difficult, if not impossible.
Some mortgage brokers would suggest seeking approval for a Commercial Mortgage, which is the same type of mortgage needed to open a bed and breakfast or other registered business.
Know Your Risks, Know Your Rewards
Are you interested in exploring if rental property ownership is right for you? We would love to hear what you’d like to achieve. Even if a mortgage financing solution does not materialize within the first evaluation, sometimes making a few small refinancing adjustments can put rental property within reach in just a few short years.