Obtaining financing when you’re buying an investment property can be challenging, even for seasoned homebuyers. If you’d like to take advantage of current low interest rates and purchase a property with the intent of leasing out part of the space, you will need to factor additional expenses into your financing decisions. Leasing an apartment will also allow you to generate income and gain experience as a landlord.
Are you buying a primary residence or an investment property?
Before you contemplate buying a property and renting part of the living space, you should determine your short-term and long-term goals for the house. When you consult with a mortgage lender about financing, you will first need to ensure that the proper classification is given to the property because financing options and interest rates will differ between primary residences and investment properties. Determine the primary reason for purchase — will this house be your main residence, or are you buying the home expressly to profit from rental income? Keep in mind, rental income and related expenses must be reported for tax purposes. As such, you may want to consult a tax professional for advice before buying an investment property.
How much can I afford when leasing part of a home?
If you purchase a home with the intent to generate rental income, you should factor this situation into your affordability equation. In addition to rental income, you will receive tax benefits in the form of deductible expenses such as mortgage interest, real estate taxes and other rental expense. The IRS provides guidance in regards to dividing expenses between the rented portion of your property and your primary residence for tax purposes. Any reasonable method of dividing can be used, but the most common are number of rooms in your house or square footage. When using a mortgage calculator to calculate what you can afford, don’t forget to include all of the additional income and expenses associated with owning a rental property.
Becoming a landlord
Taking on a renter also means accepting additional property management responsibilities, even when you are living in the same residence as your tenant. Before renting out space in your home, make sure to perform a background check on the potential lessee. You will also need to draw up a lease agreement that stipulates the parameters of your business arrangement. A wealth of resources is available online to assist you, including the Georgia Landlord Tenant Handbook.
If you’re interested in buying an investment property or renting part of your home after purchase, talk to a mortgage lender early in the process. Experienced lenders can help determine how much you can afford and the best way to structure a residential property loan.
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