Many Americans dream the path to building wealth is like a trip around the Monopoly board, buying up properties that generate rental income. That can be true, but financial advisers warn the costs and aggravations of playing the landlord game are increasing.
People thinking about becoming landlords might have a tougher time turning a profit after a year marked by higher home prices and mortgage rates. Rents are up too, but because of inflation so are the costs of repairs and routine home maintenance.
The benefits to owning a rental property—passive income and tax breaks—have been touted frequently on YouTube and TikTok in recent years. However, anyone planning to buy a rental property right now should factor in the likelihood of higher costs and unexpected expenses.
“Profitability, especially in the short term, certainly isn’t guaranteed,” said Rick Sharga, executive vice president of market intelligence at real-estate analytics firm Attom Data Solutions.
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Landlords often rely on debt to fund their purchases, especially as home prices stay well above their prepandemic levels. As interest rates rise and recession fears mount, taking on that debt becomes riskier and more expensive.
The mortgage rates for a typical 30-year loan for owner-occupied homes rose from below 4% to around 7% in the past six months, though have eased a bit recently. Investor loans are more expensive, with interest rates in the 10% to 12% range, depending on the type and term of the loan, up from about 7% to 9% earlier this year, said Mr. Sharga.
When applying for a mortgage on an investment property, buyers need a larger down payment than for a primary or vacation home and might need to meet stricter lender requirements, said Robert Heck, vice president at online mortgage marketplace Morty.
Lenders usually require a down payment of at least 20%, because they are taking on more risk, Mr. Heck said.
Lenders have firm underwriting requirements for investment-property loans, including higher minimum credit scores (in most cases at least 700) and a more desirable debt-to-income ratio. They typically require greater cash reserves than they would for a primary mortgage, Mr. Heck said.
If you are putting more down and your rate is driving up your monthly mortgage payments, then you are under more pressure to keep your property fully occupied.
Sandra Ellzey said her home in Cary, N.C., appreciated about 40% at the peak of the market earlier this year. She decided to borrow against some of her home’s equity and take out a home-equity line of credit to purchase a nearby three-bedroom ranch rental for about $293,000.
Last month, the rate on the Heloc was about 6.49%. It recently jumped to 7.24% and is set …….