My home buying guide is geared toward those buying a principal residence, but a good portion of our business are buyers who wish to buy an additional home or an investment property. Here are some considerations unique to that scenario.
First, it’s important for us to know why you are buying another property. Do you plan to renovate and flip it? Or do you plan to rent it out for income? The considerations are quite different for each. We’ll address purchasing a rental.
If you are planning to rent it out for some period of time, be aware that it is probably not advisable to purchase a condo or townhome, because chances are you will not be able to rent it out. Virtually every condominium ownership complex in Atlanta has a 24 percent or more rule under which no more than 24 percent of the units can be rented out at any given time. Since 2008, when the real estate market took a huge dive, that limit is reached in most complexes with a long waiting list of owners wishing to rent out their units. In addition, many complexes have a rule that you must live in the condo or townhome for some period of time (typically a year or more) before you are even eligible to get a rental permit.
The purpose of the rental limits are to preserve future buyer’s ability to get a loan to purchase in the complex. Underwriting guidelines usually specify that a certain percentage of units must be owner occupied in order for the lender to underwrite a loan for a purchaser. If there are no rental limits, then, the units must be purchased with cash or alternative financing, making those units much less marketable and therefore less valuable. Note that some townhomes are “fee simple” rather than condominium ownership, and you would be able to rent out a fee simple townhome. The difference is that in condominium ownership, you own everything within your walls but not the exterior of the home or the ground it sits on – those are owned in concert with everyone else who owns in the complex. In fee simple townhome ownership, generally speaking you own your home, the roof, and the ground it sits on but you are simply attached to other homes. With fee simple ownership, there is rarely any restrictions on the owner being able to rent out a unit. But condominium ownership is much more common than fee simple.
Early on, narrow down the neighborhoods or areas you are interested in. Be sure to consider convenience, schools, crime, and overall appreciation potential (this is where your Realtor comes in very handy). We will pull homes like the homes you are looking out so you will know what rent you’ll be able to command for a given property. Compare the rent you’ll get with your monthly mortgage payment and expenses (a good rule of thumb is a 10 percent monthly management fee if a company is managing for you; and another 10 percent for repairs and other expenses). Keep in mind that there may be gaps in between tenants when you will have no income from the property.
If you pick carefully and choose a home in an area that appreciates, you can make a great return on rental property. Just be prepared for the risks involved. No matter how careful your background checks, tenants can go “bad.” They can tear up your house and refuse to pay rent. Then you must pay to fix the house and pay legal fees to throw them out. Rental properties are not for the faint of heart. But they can also be a great way to diversify your portfolio and make a great return.
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