General questions on rental properties

[Account Closed]

Hello all.... I am reading and researching and really enjoy the learning process as it slowly becomes clearer, I’m English and the property buying and selling processes are somewhat different but, I’d like to think I’m a fast learner.... In examples given in adverts of properties that have tenants and are managed, they all list... ( for example) Gross rent $1000 Management fee $100 Property taxes $50 Insurance $60 Owner paid utilities $40 Vacancy reserve $50 Maintenance reserve $100 Net rent $600 My question is, do I receive $900 in my bank monthly, ( rent less management fee) ? Are some utilities always paid by the landlord, or is that simply depending on the deal ? Are taxes and insurance paid annually ? Finally, with mortgages for this kind of business, are loans available that allow regular overpayments and apply them to the capItal ? And / or allow repayment every 2 weeks rather than monthly ? Thanks in advance Anyone who wants a partner in deals up to $150k, ....I’m all ears !

[Kerry Baird]

@Account Closed

We lived in England for 16 years, and bought property there.  Not many of us on BP can compare investing in the two countries, so I will give it a go. 

I’m going to go back and answer your questions, with en English spin on the words.  I’m going to answer your questions from the perspective of understanding mortgages in both countries.  

The terminology “buy to let,” as you might know, isn’t used here. We are seeking an Investment mortgage on a rental property.

I don’t pay utilities on my rentals, my tenants do.  I have one pool house, and I pay for the pool service. 

Property Tax and insurance funds are typically escrowed, which means gathered by the title company and distributed on my behalf.  Mine are typically annual, but can be distributed quarterly.  

Mortgages are a different creature here. In the UK, a "fixed" rate was fixed for 4, 6 or x years, right? Here, that is an "ARM" or adjustable rate mortgage. The 30 year fixed rated mortgage is like gold, as it allows long term stability that is unheard of it other parts of the world.

A fixed rate mortgage here is commonly 30 years, even with a “buy to let” mortgage.  There are conventional mortgages...government backed paper by the agencies called Fannie Mae or Freddie Mac.  If we buy as owner occupants, we can buy a house, remain a year, get the lowest interest and deposit amount. We can keep going in this fashion to 20 houses with conventional loans.  

Also conventional (govt backed), but called investor mortgages (not called “buy to let” but the same idea), are a slightly higher down-payment (“deposit”) and slightly higher interest rate, but also can be fixed for 30 years.  These are 20% down payment, on properties 1 to 4, and 25% down on property 5 to 10.  These parameters change regularly; Fannie Mae publishes the rules online and banks who offer conventional mortgages operate by their rules.  Some banks will use what is called an “overlay” or additional rules for their lending. 

Over ten properties will bring you to “portfolio” or commercial lenders, and no longer govt backed.  And there are slightly different parameters for a property that has more than one unit, commonly called Plex units.  Duplex, Triplex, and Four-plex or quad-plex.  Often these small multiunit mortgages come with a higher deposit (25% rather than 20%).  Over 4 units will disqualify you from conventional lenders...5 and up are only commercial.   You would talk with the mortgage department in your local bank to pursue financing for 1 to 4 units, and to the commercial department for 5 units up...and the left hand often does not know what the right hand does.  One department can say no and the next room over, someone might say yes.

To your next question, yes most loans do allow you to prepay the principal (rather than “capital repayment”), but you must direct the lender to apply it to principal and not to interest, which can be done online or on the check in the comment section.  Some mortgages do have “pre-payment penalties.” It is very common to set up automatic payments, either monthly or bi-weekly, either online or by check.

You will want to look for “foreign national” lending, and perhaps start with a mortgage broker rather than a specific bank, so that you are directed to the mortgage that will be most suitable.  As an example, Corevest offers a product for foreign nationals.  

There is a product called a line of credit or a HELOC, Home Equity Line of Credit, that is secured by the property (and easier to find on an owner occupied property than on an investment property) and allows one to make draws on the line. It is similar to a credit card, with variable interest. This scenario will typically have a fixed mortgage recorded against the equity, in the primary position and and the HELOC recorded in second position, but has the benefit of allowing us to take a draw and pay it back, and take another draw and pay it back. It acts somewhat like a credit card that is recorded against the house.

A title company does the record search, insures good title to the property, and arranges for “completion,” which is called “closing” here, where both parties sign their respective documents.  These are sent to the county recorder, where the documents (deed and mortgage instrument) are recorded.  Unlike in the UK, the deed remains with the owner, and not with the bank.  There are no such things as gazumping or chains.  :D

We have a form of council housing, and there are low income subsidized housing programs for this type of tenant.  This is called “Section 8.”  Look into this program, since you are looking at lower end property.

I personally like housing that is blue collar trending to white collar, to address your point about the lower end of the housing market.  There is less drama, fewer evictions, which means less turnover and less damage to my property. I harden my rentals by removing carpet and using durable materials for flooring, paint, and countertops. I allow dogs.  My goal is to reduce turnover and keep tenants as long as possible, with the least amount of damage to the house.