Financing rental property
Financing of rental properties is resorted to by many people. Some people also call it as buy-to-let property finance. Financing of rental properties is different from financing own home. First of all, interest rate applied on rental property financing is higher than financing of own homes. Secondly, lenders providing finance for buying rental properties impose strict criteria. Financing of rental properties is affected by many factors. Major factors are the lending status, income of applicant or borrower, size of deposit and good business case.
Financing of rental properties is done by various types of financial institutions. These include banks, building societies, credit unions etc. Finance is normally provided to those persons that wish to purchase a buy to let property on leasehold basis. Financing is also done with respect to freehold cottages, terraces, houses etc. Some banks may not provide finance for commercial rental properties. Most of banks providing rental property finance require that property should have an assured short hold tenancy agreement.
As per the study conducted in United States, about 50% of banks allow rental property finance for HMO or Homes of Multi Occupancy. This is because in such residential buildings, different contracts are there for different rooms, provided contracts are short hold tenancy agreements. Maximum number of rooms in such residential units should be 5 or 6 as most of banks do not like to provide finance for those rental properties that have more than 5 or 6 rooms. Another requirement that is looked by most of lenders for financing of rental properties is that rental unit should have the appropriate environmental or fire certificate. Similarly, it is also desired that residential unit has obtained the necessary agreement from the council for operating unit as HMO.
It was also observed that banks would not lend money toward rental property finance for DHSS tenants. These tenants are those people that are claiming unemployment and housing benefits from the government. There are also some lenders that provide finance for rental multi occupancy homes only when these units are filled with students.
One of most difficult tasks regarding rental property financing is to find a lending institution like bank etc for homes that have sitting tenants. Sitting tenants are those tenants that have assured tenancy agreements. This is because such tenants have full rights for staying and in such cases, value of property is generally reduced to 75%. Only way out in that situation is providing more deposit or down payment. Many lenders require such deposit to be 40-60% of the purchase value.
Financed rental property can be used in two ways. First, a person can allow sitting tenants to remain there if they are elderly or they are ready to move to another appropriate home. Second way of using the financed rental property is to keep the existing tenants indefinitely and enjoy the rental income.
As far as the interest rate of rental property financing is concerned, it is normally 0.5-1% higher than the SVR or Standard Variable Rates offered by the lending institution. This is done so as to cover the risk attached with financing of rental properties.
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