You can buy a home and turn it into a rental property, even if it’s under a mortgage. Besides, it’s a good time to let homes today. Forecasts show that rents will rise by 4.5 percent by the end of 2022. Experts expect rent to reach 3.5 percent in the UK and eventually surpass pre-pandemic levels. The demand for rent will likely stay higher than usual, especially in city centers.
But before buying a home to rent out, consult your trusted mortgage broker. While it’s not downright illegal to rent out a home with a mortgage, your lender must permit it beforehand. Hence, inform your broker that you don’t intend to live in the house—at least in the meantime—before they match you with a lender. Don’t skip this step because some lenders might not allow taking out a loan for a rental property.
That said, here’s the process of buying a rental property with a mortgage:
1. Review Your Contract
Do this is if you’re living in your home at the moment. That way, in case your lender refuses to let you rent it out, you can state that your intentions don’t breach the contract.
Failure to abide by your contract can lead to penalties. Worse, it can affect your ability to borrow money again.
2. Consider Alternatives to Renting Out
If your mortgage contract prohibits you from renting out your home, consider other options. You can sell the house instead if you need funds badly. Selling a home with a mortgage isn’t illegal. It’s even common. But it doesn’t transfer your mortgage to the seller. You’d use the proceeds of the sale to pay off your remaining balance plus interest.
You can even make a profit even after paying off your mortgage. But that’s not guaranteed unless your home’s value appreciates over time. If the sale’s proceeds fall short of your outstanding mortgage balance and selling costs, then you need to cover your unpaid debt through other means.
But if you’re allowed to rent out your home, that’s an easier way to raise funds for your mortgage payment. Considering the current demand for rent, you’d likely find tenants quickly. People have been looking for houses instead of flats since the pandemic, so you’re in a favorable position.
3. Prepare a Plan B
You might have a prospective tenant now, but what happens if they suddenly terminate their lease contract? Worse, what if they can’t pay the rent and you’re forced to evict them? Either situation will create financial problems. It will affect your ability to pay your mortgage if you don’t have another source of income.
Hence, prepare a Plan B in case you face these scenarios. Always budget for an empty house. You can use your funds from your emergency savings as well. Without backup funds, you’d risk foreclosure.
4. Make Your Home Ready for Occupancy
Don’t seek out tenants without doing a bit of home makeover first. Clean the space, perform repairs, and take out any personal items.
You can keep your furniture if you’d have another place to live in. If you decide to clear out your home instead, inform your prospective tenants that they arrive in an unfurnished abode. Leave the essentials, however. That includes bathroom fittings, kitchen appliances, and utilities.
Inspect your home for any safety issues as well. As a landlord, you’re responsible for your tenants’ safety. If they slipped on the floor because you didn’t disclose that the bathroom tiles are slippery, you might be required to compensate your tenant for their injuries. Your homeowner’s insurance isn’t enough of a security blanket. That policy won’t likely apply if you used your home for business purposes, anyway. Hence, obtain another insurance designed for landlords.
If your city requires permits for rental properties, don’t forget to obtain them. An inspector will probably examine your home before issuing the licenses. They will be looking for safety hazards, so ensure you or your tenant can manage electrical, fire, and other types of hazards around your home.
5. Review Some Laws
Landlords are bound to follow specific laws. For example, if your tenant can’t pay on time, you cannot harass or threaten them. You can’t evict them either without prior notice. In addition, you’re not allowed to discriminate against prospective tenants because of their race, gender, and other traits.
You’ll also need to lawyer to review your lease contract, consent forms, and other formal agreements. You can only finalize transactions with your lawyer’s approval.
Follow these steps as you buy a rental property with a mortgage or turn your home into a rental property in the middle of paying your loan. In turn, you won’t experience any trouble with your lender and tenants.