are you ready to be a landlord
TRANSCRIPT
ARE YOU READY TO BE ALANDLORD?
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If you are considering keeping your current home andrenting it out while purchasing your primary residenceelsewhere, you have many things to consider. Noteveryone is cut out to be a landlord, both emotionallyand financially speaking. Once you realize that you areable to handle the responsibilities that come along withrenting your home, you need to consider the financialaspect as lenders look at it a little differently than youmay think. Understanding what you will have to provideand the qualifications you will need can help youdecide whether becoming a landlord is really the rightstep for you.
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Rental IncomeIf you think that the rental income that you plan on obtaining will
automatically be tacked onto your regular salary, you could be
mistaken; there are rules you must consider. First – you must owe less
than 70% of the value of your home. If your loantovalue ratio is higher
than 70%, you may still qualify for another mortgage to purchase a
home, but the rental income will not be able to be used to qualify you.
In these chases, your debttoincome ratio will need to be low enough
with two mortgages and your other monthly obligations just based on
your regular salary. If you do owe less than 70% on the home you plan
to rent out, you can use 75% of the rent that is to be charged as part of
your income assuming that the potential renter signs a proper lease
and that you can provide proof of a paid security deposit.
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Rental Income
As with any loan, everything is up to the lender’s discretion. He
will go over the lease with a fine toothed comb as well as
source the funds of the security deposit. Everything needs to
fall into line in order for the lender to take on the risk of you
owing two mortgages at one time. Not every lender will be
willing to take on this risk, especially in today’s housing market.
If the lease does not look legitimate or the renter does not
provide the security deposit, the lender will not provide you
with the mortgage you need.
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Other Financial Implications
There are a few other financial implications that you must
consider. Aside from the fact that you should have some money
set aside in order to pay the rental property’s mortgage should
the renter default, you need to consider the tax implications that
you will have to face. Rental income, as the name suggests, is
income, so you will have to pay taxes on it. In addition, if you
decide to sell the property in the future, you will have to pay
taxes on any profits.
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Other Financial Implications
The profits are determined by the value of the home at
the time you sell it versus the price you purchased it for
originally. If you make a decent profit, that could be a
significant amount of taxes you will owe in the end.
Comparing how those taxes will affect you and how
much money you will make on renting the property can
help you make the right decision.
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Rest assured, there are lenders out there that arewilling to provide a mortgage for a primary residencewhen you are a landlord, but you have to prove yourworthiness. Don’t jump in headfirst without talking toyour lender as well as your accountant. Rentingmight sound like easy money, but it is a lot morework than many people realize. Understanding whatyou are getting into considering your time andmoney will help you make the right decision in thelong run.
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INFORMATION PROVIDED BY:
Justin McHood
Mortgage Commentator
Information Originally Published: 10/02/15
Justin McHood is Americas Mortgage Commentator and hasbeen providing Mortgage commentary for over 10 years.
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