Managing Mortgages – The Ultimate Guide for Real Estate Investors

When buying homes as a real estate investor, many people will choose to mortgage as the means to finance their new investment.

Managing the payments for the homes that you’re renting out is an absolutely crucial way of making sure your investment always brings positive returns.

  1. Picking good mortgage terms
  2. Managing the properties themselves with making sound investments in the property and hiring the right people to do repair work.
  3. Picking tenants (long-term, short-term, singles or groups?)
  4. Knowing when it’s time to back out

Planning Finances for Real Estate Investment

Getting a mortgage as a real estate investor can be more difficult than it would be for a personal home mortgage.

There’s a higher risk for banks to invest, so if this is your first real estate investment you’ll likely need to be prepared to have a bigger down payment than you did for your own home.

Be ready to have a down payment of 20-40%. Your lender fees will likely be higher, and your interest rates may also be higher.

If a 40% down payment is too high for your current financial status, you can keep looking for a small down payment, or even use a real estate investment crowd-funding site, which can be more flexible, but could end up costing you more. Plenty are credible – just do your research beforehand.

Some real estate investors choose to go in with other people – but as with any business partnership, you have to choose your business partners wisely. Pick people who would be likely to succeed, and make sure any agreements are legally binding, and always use the proper channels required to make it a profitable agreement between both parties.

If you’re just starting out as a home-investor, you could also do what is colloquially referred to as “house-hacking”, where you use your credit score and income to buy a bigger house than is necessary for your own personal needs, rent the extra space to other tenants, and essentially be your own landlord.

Sounds like a pretty sweet gig, huh?

This lets you get the mortgage terms of a personal mortgage, while still starting your income in real estate management and investment, and live “for free” from the rent of your tenants.

It’s a great way to get your feet wet in the industry and get inside-eyes on the process.

Once you have more than one mortgage, it will become increasingly difficult to get loans – your credit score and income will need to support multiple loans.

You should also prepare and plan for expenses in advance. Make adjustments for things like evictions, damages, and any other unexpected expenses.

Don’t let the higher rates and business fees make it seem like it’s impossible to be a real estate investor. Just like any other business, there are business expenses associated with being a real estate investor.

Invest In Your Properties and Make Homes Worth Renting

As a property owner, you’ll be constantly evaluating if a renovation project is worth the investment.

  • Will that new $6000 bathroom bring you $6000 in property value?
  • Will installing a garage increase the likelihood that you’ll have quality tenants?
  • Will you be able to afford the mortgage with the other costs of renovations?

You will ask yourself many times if investing back in your homes is worth it, and most of the time, it will be. There are many variables – cost of labor, cost of materials, neighborhood expectations, and so on.

While it is very common that most renovations bring you back less than you spent, the goal is to minimize losses and gain returns through having better tenants and increasing the longevity of the property.

Expenses incurred by renovations and repairs are a necessary cost of home ownership – especially when renting to tenants. There is a balance of impressive renovations and fixtures and what target market you are trying to entice to rent from you.

You will need to balance the payments for renovations with your mortgage payments. It can be beneficial to have a schedule of renovations that you can stick to, so you can plan them with your mortgage payments.

There are also a few ways to minimize costs of renovations without cutting corners.

It helps if you can self-install successfully.

Many property owners, especially those with multiple houses, learn basic renovation, plumbing, and electrician work themselves. Sometimes they’ll even get certifications. Don’t try to be an expert in anything you aren’t trained it. It’s very possible that you could damage your home more than you repair it.

You may also be able to negotiate, especially if you have many properties, a better rate with local service workers, like plumbers and electricians, if you have multiple properties and give them regular work. Many small business owners are open to negotiating payment terms or discounts if you’re a bigger account for them.

According to Bankrate.com, the remodels that lose the least value are:

  • Garage door replacements
  • Manufactured stone veneer
  • Entry door replacement (steel)
  • Deck addition (wood)
  • Minor kitchen remodels
  • Siding replacement

You can also research your neighborhood and see what houses are worth more, and determine if there are any improvements you should make to compete at a local level.

For instance, if you live in an area where you have very hot summers (like here in Dallas) or very cold winters, investing in insulation or a good central air system could be vital to attract good tenants. Tenants often look for things that will lower their bills, even if it means higher rent.

No one likes a hot home in the summer!

Choosing the Right Tenants for Your Investment Property

If you’re new to the rental/investment property industry, you should know that there are a lot of laws that protect the rights of tenants.

These laws are to ensure a fair market, and to ensure that property owners do not discriminate based on protected classes of people, like race, religion, sex, parenthood, or disability.

Check with your lawyer if you need a better explanation of these guidelines and the benefits of these laws.

Not abiding by fair housing legislation can be costly, and damages your credibility as a landlord.

First, when checking for the right tenant, you’ll want to run a thorough credit check. Some people view credit checks as a costly part of being a landlord, especially if you’re running lots of potential tenants, but the cost of eviction can be much higher – so it’s always best to make sure you rent to responsible people.

Renting to the wrong person and losing on a month or more of rent can cause you to miss a mortgage payment – especially if you have a small pool of properties. Thus, it is vital to have the right tenants to make sure you can keep your mortgage payments on time.

When examining a credit check, check their income-to-debt ratio, check their history of bill payment, and check for any evictions or bankruptcies.

Verify their income. It used to be a rule of thumb that your rent shouldn’t be more than 30% of your income, but with rising rent prices and lower wages, it is pretty acceptable for single people to be prepared to spend approximately 40% of their income on rent.

While it’s common to check pay stubs, you can even call their employers directly to confirm their employment – when they’ve been employed since, what their position is and what it entails, and what their payment terms are like.

Getting a criminal background is also a sound idea. While certain states have civil protections against some criminal convictions, you can justify your rejection if a conviction implies that someone may be a danger to other tenants or the property. Histories of domestic violence, drug charges, or theft are immediate red flags. Speeding tickets or jaywalking, maybe not.

Rental history will also tell a lot. You can check with previous landlords to get a feeling for the tenant. Red flags include damage, constant and unreasonable requests, missed payments, or abrupt moves and evictions. While some things can be circumstantial, and some landlords may have not kept a property well, multiple landlords confirming behavior can let you conclude if a tenant is worth renting to or worth passing on.

If a prospective tenant is new to renting, you can secure yourself by requiring co-signers.

The longer you believe the tenant will stay, the more secure your mortgage payment schedule can be. Reliable income is key to staying on-time with your mortgage payments, and relisting an apartment or room can be expensive.

Knowing when to tap out on a property

If you’re beginning to diversify your properties, expand to a different market, or even relocate, maybe it’s time to sell the home and close out as many of the expenses as possible.

Some property managers rent properties out for side income, and find their professional careers taking them farther away from their abilities to be an excellent landlord. If you don’t feel like hiring a professional property manager, or just feel like it’s time to exit the market, you can always sell your home.

When mortgage payments become more than their worth for your financial and time investment, you can consider contacting a real estate agent or a homebuyer to make a quick deal to help you get your finances back in order while you pursue other options for income. We deal with these kinds of things a lot, so if you have more questions on what your options are, you can give us a call by clicking here.

Sometimes, you may just want to explore the opportunity of moving to different markets as well. If you’re a property owner with 3 properties spread over hundreds of miles, where two of them are close and one is far away, it might make sense to find someone to take over the third one.

It really comes down to balancing your time and money well – if you find yourself sinking money or time into a property and it no longer feels worthwhile, there may be someone who can manage that property better. This helps secure your finances by giving you payment all at once for the sale so you can pay more of the mortgage off at once.

Depending on your personal goals, you can ask yourself a few of these questions:

  • Do I enjoy being a landlord for this property or properties?
  • Am I losing money on this property?
    • Is this loss temporary, and how can I mitigate these damages?
  • If I don’t sell this house, will I lose more money?
  • Is my current mortgage payment to rent income payment model sustainable, all of my other income considered?

If your answers point that tapping out on a certain property may prove to save yourself some trouble, it’s worth considering. Just make sure to prepare all the documentation, such as a history of investments, payments, repairs, and any other relevant information that a buyer may need to know.

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