Traditional and Creative Ways You Can Finance Your First Houston Rental Property

By Vestpro Residential Services

Are you planning on buying your first rental property in the Houston TX area? If so, as a first-time investor you’re probably wondering how you’re going to purchase that rental property especially if you already have a primary residence and other financial obligations.

Thankfully, you have options available that will help you get that rental property sooner than you think.

Get A Traditional Mortgage Loan

The first and obvious way you can finance the purchase of a rental property in the Houston TX area is to get a traditional mortgage loan and use the equity from your primary residence towards the purchase of that rental property.

Most new investors with good credit will go this route because it’s the obvious way of using the equity that you already have in your home and making it work for you.

Here are some more options to consider for buying a rental property:

Seller Financing

This involves getting a loan from the person you’re buying the property from. In some cases, if the seller is willing to lend you money, it’s easier (read: less paperwork) than getting a loan from a bank.

I’ve seen these deals work in a number of scenarios: The seller might finance either the down payment or the full purchase price. The seller might be another property investor — or they might be the property’s live-in owner.

The key to success is to ensure you agree on a fair interest rate for the loan. If you don’t have much experience in this area, it may be wise to work with your CPA and/or attorney. And regardless of how much experience you have, be sure to get the terms of the loan in writing, with signatures.

Partnerships

Another great financing option is to partner with someone who has enough money for a down payment. This is an effective strategy if you have a friend or family member who’s interested in getting involved in property investment, but maybe isn’t as interested in the day-to-day work of screening tenants and collecting rent payments.

In this scenario, what often happens is that one partner puts up money and the other handles all the actual work of being a landlord.

The key to success here is to agree on how to split proceeds. I recommend thinking about it in terms of aligning the risk and reward with costs and benefits. Your partner is taking on all the financial risk, but you’re putting in all the legwork of bringing in revenue via rent. Make sure the way you split proceeds reflects your contributions.

Whatever you decide makes sense, it’s best to have your terms in writing. Services like LegalZoom and Rocket Lawyer can help with drafting basic legal docs if you don’t have an attorney. (Full disclosure: Rocket Lawyer is a partner of ours.) Another strategy we find effective is to form an LLC, which requires you to put together an operating agreement. That document is a great place to lay out roles and responsibilities for all parties.

Government Programs

The Federal Housing Administration (FHA) was founded to encourage homeownership. One of the ways it does that is by offering homebuyers the chance to buy property with just 3.5% down.

While FHA loans are specifically designed to facilitate the purchase of owner-occupied homes, it’s completely allowable to buy a two-, three- or four-unit building, live in one unit, and earn rental income from the others. In fact, this can be an incredibly cost-effective way to finance a rental property, especially if it’s your first.

FHA loan limits are different in every county, so part of the art here is making sure the loan limit where you want to buy is high enough that you can purchase a multi-unit property.

Get Property Management in The Houston Area

Once you own your first rental property in the Houston area don’t waste time managing it yourself, let Vestpro Residential Services manage it for you. To learn more about our services contact us at (832) 971-1841 or click here to connect with us online.

5 Tips for a Low Stress First Rental Property Investment

Tip #1: Advice is OK, but Do Your Own Research

Take courses, read investment books, go to a seminar, or any other learning process that helps you to gain confidence to make decisions. I suggest that any books, courses or seminars be about how to select locations, value properties and evaluate the rental market. Your success will be based on your due diligence and most of all buying right in the right area.

Your first rental property investment is best done in your area of residence, where you know what’s going on economically. You want to know that the economy will support today’s decision into the future, as this isn’t a short term strategy. Understand who the major employers are, what drives people to move in or move away, and if things look good into the near future.

Tip #2: Don’t Just Rely on Real Estate Agents

Sure, now and then you can work with a real estate agent who handles foreclosures and get a good deal. Remember though that these will be “listed” foreclosures on the MLS, Multiple Listing Service. You and all of your competitor investors have access to the same information, so competition will likely drive up your cost of acquisition.

If you do your own marketing and locate motivated sellers, you have a greater chance of negotiation a good deal. Another approach is to work with an experienced real estate wholesaler. They are investors too, but they are experts and finding great deals that they can flip to rental property buyers at a below-market value price. Just check their references out and be sure they do know what they’re doing.

Tip #3: Know What Will Rent and for How Much

Check with property managers who handle single family homes. Go to the classifieds and check out what homes similar to the one you’re considering are renting for. Are the owners offering incentives like free months? This is usually a sign of a soft rental market or heavy competition, so you may want to try another neighborhood or property type.

Call on ads, drive around, talk to landlords as if you’re a tenant. The most important thing for you to know before the next tip is what you can reasonably and conservatively expect for rental income and low vacancy.

Tip #4: Get the Right Financing & Cash Flow

You need to know all of your costs, including estimating repairs and other maintenance costs. But, the mortgage is going to be your largest cash outlay, so it is your most important cost consideration. You’ll need to put 20% down or more in most cases. For a rental unit you may also pay a slightly higher mortgage interest rate. A great credit history helps in this regard.

Get a firm handle on all of your costs, then see what your mortgage payment with taxes and insurance escrowed will be. Let’s use an example of a $150,000 home with a $32,500 down payment and closing costs. If you can manage to clear even $250/month over cash out of pocket, your return on the actual cash invested is going to be around 9%.

Tip #5: Lock in Equity at the Closing Table

NEVER buy at retail market value. If you can’t get the home at a 10-20% discount to its current market value, don’t do the deal. You want to leave the closing table with that equity as either future profit or a cushion should you have to sell before your initially planned liquidation date.

If you’re going to work with a wholesaler who you may meet at a local investment club, be clear that you’ll want to see their valuation calcs and you’ll check them with your own. You give them your requirement. If it’s 15% below market value, then they will know what they have to deliver.

You’re in control here, and you don’t have to make a deal until you know it’s going to be a great investment.

Get Property Management Here

For professional property management in the Houston Texas area contact Vestpro Residential Services at (832) 498-0016 or click here to connect with us online.