Have some extra cash in your pocket? Hearing all the buzz around the real estate boom in Charleston? Thinking of buying a rental property? Let’s talk!
I love real estate in all its forms and thoroughly enjoy helping clients learn about the industry and how they can make the best real estate choices for their goals.
The term “rental property” and the term “investment property” are often used interchangeably; while a rental property can be an investment property not all investment properties are rental (ie: a home bought to flip and resell). For this discussion we will be exclusively discussing homes bought for rental purposes.
When a client comes to Front Porch Properties with interest in purchasing a rental home in Charleston I first direct them to a lender. Financing for a second home/rental property is not the same as buying a permanent residence. Typically, conventional loans are used to purchase a rental property, as other government-backed loans (FHA, VA) will not apply to a home that is not your permanent residence. With a conventional loan for a rental property your income (vs credit score) may be most vital when applying for a mortgage. The lower your debt-to-income ratio the more likely mortgage lenders will approve you for a secondary home mortgage.
A good debt-to-income ratio is 36% or less, 30% is ideal.
Aside from mortgage approval it is important to look at your personal finances and financial goals with this home purchase. Long term or short term rental? Will you be doing any renovation? Will you be paying a property management company? Do you plan on living in the home at some point in the future? Are you prepared to pay for 2+ mortgages if the rental is vacant? It is important to note that a secondary home is subject to an increased property tax rate of 6% (vs 4% of primary residence in SC).
It is also important to know the statues and laws regarding rentals in your area of interest. HOAs and Regime bylaws can determine the legality of rentals in certain developments as well as the county or city. For example Charleston passed a new ordinance on short term rentals not long ago which now requires a permit for short term rentals along with a certain amount allowed in the city and a list of other qualifiers. Do your research including evaluating the competition (How many homes close are rentals? What’s the average rental rate? How does your property of interest compare?).
Now, what about the PROFIT? Making money is the real reason most are interested in buying a rental property in Charleston, SC. Demand equals cash, right? …. MOST OF THE TIME. We often refer to the 1% rule. This is a strategy used in real estate investing to determine your cap rate: investors should calculate monthly rent to be at least 1% of the total purchase price for it to be “profitable”. Now your definition of profit could vary. Is your profit calculated in monthly cash or is it calculated long term in resale of the home down the road? Certain homes may be better suited to your goals (this is where a good real estate agent comes in handy, like us at Front Porch Properties).
Another advantage to owning rental properties is the opportunity for tax-write offs. Repairs, updates, yard work are all considered for write offs as well as the property’s depreciation. Also, if you choose to manage the rental home yourself you can deduct up to $25,000 in rental “red ink” from your non-rental income.
If you are interested in the idea of owning a rental home in the greater Charleston area and have questions on the ends and outs or need a lender to chat with, Front Porch Properties would love to hear from you and help. Fall is a great time to purchase a rental property giving you ample time to close, do some fixing up and get your home on the rental market for spring. While turn key is always an option I find most of my clients prefer to snag a deal and put in some elbow grease on their rental homes.