3 ways buying an investment property is different from buying a home, according to a landlord who knows
- Investing in real estate is different than owning a home to live in yourself.
- Borrowing money to buy a rental property comes with several requirements stricter than those typical homebuyers face, like a higher down payment and higher interest rates on a loan.
- Also, landlords have to treat everything about the homes they own as a real estate as a business — from who moves in to how you work with tenants.
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Investing in real estate to build wealth is generally much different from buying a home to live in yourself. From the process of financing and buying a property to maintaining it, being a landlord is a job.
While it's often more difficult than buying a home to live in, it also has a unique set of rewards. Ogechi Igbokwe, a real estate investor and landlord who owns nine properties, says there are several things that distinguish owning an investment property from owning a home.
1. Investors face more stringent lending requirements than homeowners
The process of borrowing money to buy a rental property is different from that of buying a home.
"You have to make sure that you have a good credit score," Igbokwe says. This isn't so different from buying a home — anyone applying for a mortgage will see their interest rate fluctuate with their credit score — but the range of interest rates for investors is higher. Investors often see mortgage interest rates between .5% and .75% higher than the typical homeowner, according to data from The Mortgage Reports.
"Second of all, you're required to put more money down," Igbokwe says. When she bought her third property in 2017, she was required to put 25% down. That's more than the 20% typically suggested of homeowners, with some programs allowing smaller down payments.
Anyone who's considering buying a home should know their debt-to-income ratio, which measures your debt — including mortgages, student loans, and credit card debt — to your income. Conventional loans require a DTI ratio below 36%, but can be as high as 50%, depending on your financial situation.
But for investors, "your debt-to-income ratio is especially crucial, especially if this is your first rental property," Igbokwe says. "The purpose of buying real estate investments is to make profits, so hopefully your properties bring cash flow. But for your first rental and second rental, it's especially crucial that you don't have a lot of personal debt," she continues. Having that debt without the accordant income from your properties will increase your DTI, making it harder to borrow money.
Lastly, banks will also require an emergency fund: a cash reserve that you won't be using for this purchase. While it's suggested for a typical borrower, too, it's more important for a landlord, Igbokwe says. In her experience, banks want to see three to six months' worth of expenses. "They want to see that you have something left," she says. "They want to feel comfortable knowing that you can afford to make the mortgage payments if it doesn't work out with tenants."
2. It's a business, not a home
When you buy a home for yourself, it's not a business — it's simply where you live. But as a real estate investor and a landlord, a home will essentially become a business.
Especially when working with tenants, you're essentially running a customer service-oriented busines. You have to work with people, know the rules, and know how to handle working with different personalities. "It is a people management position when you're dealing with tenants," landlord Becky Nova previously told Business Insider.
In Igbokwe's experience, it can be easy to slip out of that business mindset with renters. But, she says it's critical to keeping your business running smoothly. "One of my personal experiences was transferring the trust that I had [in one tenant] to someone else that tenant referred," she says. She took her previous renter's suggestion, letting that new tenant move in. But, a few months later, the new tenant stopped paying the rent.
To her, it was a lesson that in business, you can't let your guard down. "Have your criteria, and make sure you screen your tenants," she says.
3. You can't get overly emotional about your properties
When you're buying a home, as an investment or not, people say that it's important to keep your emotions at bay. But, when you're buying a rental property, you need to keep your emotions almost entirely out of it, Igbokwe says.
"People get too attached. You're not supposed to be attached to anything in a building. Take your emotions out of it," she suggests.
Getting too attached can lead to overpaying for a property, or missing out on a better deal. "You have to be able to evaluate a building, analyze it, and determine if it's going to be profitable or not," Igbokwe says. "If the numbers don't work, you must walk away. There will always be other deals."
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