What Fees Should You Expect When Financing a Rental?

Interest rates remain low, making this a great time to finance an investment property.

However, it is important to be prepared for the extra fees you will face when taking a mortgage for a rental home.

These fees must be paid along with your down payment at the time of closing, if not before, and planning ahead will help prevent any bumps in the road.

Fees Charged by Your Lender and Service Providers

Many of the fees you will pay to finance your rental property are paid directly to the lender.

The figures below are approximate.

For detailed information on specific costs charged by your mortgage company, check your Truth in Lending disclosure.

  • Processing Fee: Your lender receives this amount, which is intended to cover costs associated with processing your mortgage application. These fees do not usually exceed $1,000.
  • Underwriting Fee: This charge is assessed by your lender to cover costs associated with decisioning your loan application. Underwriting fees are often as high as $795.
  • Miscellaneous Fees: Your lender is likely to charge you for any fees incurred in processing your application — for example: courier fees, postage fees, and credit report fees. All of these fees are fairly small, but they can add up to several hundred dollars.
  • Appraisal Fee: Though the cost of getting an appraisal is paid to the appraisal company, it is typically paid to the lender, who then hires the appraiser.
  • Loan Discount Points: If you wish to bring your insurance rate down, lenders may offer you the option of prepaying interest in the form of loan discount points. At closing, you pay one percent of the total loan amount, which will reduce your payments going forward.
  • Flood Determination: Lenders want to know whether your property is at risk for flood damage, so an assessment of whether the area is in a flood zone is required. Fortunately, the charge for this service is fairly low.
  • Title Fee: You want to be sure that no one but the seller has claim to the property you want to buy. Your title company will conduct a thorough search on the deed to ensure you don’t run into future issues. Costs for this service vary widely.
  • Survey Fee: Some states require a survey company to ensure that property lines are accurately recorded. Costs for this service vary, but they do not usually exceed $450.
  • Closing and Escrow Fees: The individuals who conduct your closing (for example, the title company or real estate attorney) charge a fee for their service. The costs are typically calculated at two dollars for every thousand dollars of the home’s purchase price, plus an additional amount of approximately $250.
  • Recording Fee: This is a charge assessed by the city or county recording office responsible for documenting real estate records.
  • Buyer’s and Lender’s Attorney Fees: When buyer’s and lender’s attorney fees are required, they can add a significant amount to the bottom line payment due at closing.
  • General Inspection and Pest Inspection: Whether or not your lender requires a general inspection or an inspection for wood-destroying pests, the cost is well worth the peace of mind of knowing you won’t face thousands in repair costs down the road.

The upfront costs of financing a rental property can rapidly climb into the thousands.

Preparing for these fees ahead of time will prevent unpleasant surprises when you finally get to closing.

Additional Resources

Truth in Lending Fee Disclosures

Primary Residence vs. Non-Occupied Single Family

When investing in real estate, it’s important to understand the different types of property and residence referred to in loan documents.

A single-occupancy primary residence loan is usually available at a lower rate and with a lower down payment.

Investment property often comes with a premium price tag on financing and more restrictions on a loan.

If you are interested in real estate investing but don’t have a lot of cash on hand, buying a primary residence can be a way to get the best rates without putting up a lot of cash.

What Is a Primary Residence?

A primary residence is a living space in which you reside for the majority of the year.

You must live in the house for at least six months and one day each year.

When you buy a primary residence, you may be eligible for loans with no down payment or lower interest rates. You might also be offered a longer term on the loan.

What Do Lenders Look for in a Primary Residence?

When you try to secure a loan for a primary residence, lenders look at the property differently than they would an investment property.

They look to see if the property has everything you need to make it a comfortable living space. Does it have bedrooms, a kitchen, bathrooms, and other living areas?

They might also check to see if the space is comparable or better than your existing living situation.

For example, if you currently live in a single-family house, lenders may deny a loan if you are buying a townhouse replacement. From their perspective, that would be a step down in living accommodations.

If you can’t satisfy the residency requirement, you can’t sign a loan for a personal use property.

Second Home vs. Primary Residence

You might be interested in buying a vacation home or second property if you do a lot of commuting.

You could also be interested in buying a house for a family member.

In those situations, there are ways to list the second home as a primary residence.

For example, if you are buying a home for your college-aged child, you might be able to buy a property as a primary residence.

Buying a Non-Occupied Single-Family Home

A single-family home, in the context of a mortgage, is simply a property that has only residential space and only houses a single family.

A property with an additional rental unit would not meet the definition of single family; instead, it would be a multifamily property.

A mixed-use property, one with both commercial and residential space, would also be out.

When buying a non-occupied single-family home, you are looking for a property with only a single unit.

Non-occupied refers to the fact that you won’t be living in the home after the purchase.

You could be buying on speculation or with the intent to rent out the home, but it won’t be your primary residence.

That means you need to find funding that is not dependent on residence.

Be Upfront About the Intended Use

No matter what you intend to do with the property, give your lender full disclosure.

If you intend to rent the property from day one, you qualify for a different type of loan than if you intend to move in.

If you plan to live in the house for at least a year, you might qualify for a personal mortgage.

By providing all the information, you allow the lender to find the right financing package for your needs and intended use.

What Are You Legally Required to Disclose When Selling a Property?

If you’re currently a landlord thinking about selling a house, you may have to fill out a disclosure statement first.

Even if your state doesn’t require this form, it’s recommended that you provide it, since it can protect sellers in the long run.

Here’s how it works and what kind of information you need to provide.

Major Defects on the Property

In general, you have to disclose anything that would affect property value, which includes defects that you’re aware of.

For example, if you know the faucets leak, the roof needs to be replaced, and there are cracks in the foundation, you need to disclose these problems.

This applies whether you have seen them yourself or your tenants have pointed them out.

Similarly, if there is evidence of a termite infestation on the property, let the buyers know in the disclosure statement.

Even if you’re aware that there are lots of barking dogs nearby or construction noise, you should disclose these issues because they could affect the value of the property.

Inspection Requirements

You don’t have to get a full inspection before you sell the house. You only have to disclose the issues you know about, not look for more.

Of course, the buyers will likely hire a property inspector anyway, so they will probably unearth any problems that weren’t obvious before.

If you hire an inspector yourself, and that inspector discovers problems you didn’t know about, you will have to disclose them.

But on the upside, if your inspector doesn’t find additional problems, you will have the documentation you need if the buyer accuses you of not disclosing defects in the future.

If they’re not in the inspector’s report, it will be clear that the defects are new and, therefore, the responsibility of the new owner.

Federal Disclosure Requirements

No matter where your property is located, you need to disclose whether there is lead paint in the home. That’s because the Lead-Based Paint Hazard Reduction Act of 1992 is a federal law.

However, it only applies if your house was constructed prior to 1978.

If this is the case for your home, let the buyers know that the house might have lead-based paint, and then give them 10 days to test the paint for lead.

You should also make sure they know the dangers of lead-based paint, which can be achieved by giving them a pamphlet by the EPA called “Protect Your Family From Lead in Your Home.”

Then you need to have them sign a statement that they’re aware of whether or not the house contains lead.

Keep this signed document for at least three years as proof that you’re in compliance with this federal law.

Additional Information to Disclose

Once you have disclosed the presence of lead-based paint and general defects in the home, you should find out if there are any other disclosure rules specific to your location. That’s because they vary by state.

For example, most states don’t require you to disclose a death in the home, but the exceptions are California, South Dakota, and Alaska.

In California, you must disclose any death that took place in the home in the last three years, even if it was due to natural causes.

But sellers in South Dakota and Alaska only need to disclose murders or suicides that took place within the last year.

In New Jersey, sellers have to disclose whether the house is fit to live in.

They also have to disclose any hidden defects that they know about.

On the other hand, sellers in Georgia aren’t required to offer a disclosure form at all, but they’re still encouraged to do so.

If you’re not sure what to disclose, you can ask your real estate agent about the rules that apply to your specific situation before you sell the house.

What Are the Requirements for a Mortgage on a Rental Home?

Securing a mortgage for a rental home can be a headache.

Although these mortgages work similarly to conventional mortgages, they often have stricter qualification requirements.

Below are some you may be expected to meet.

Credit Score

Your credit score plays a significant role in determining your eligibility for a mortgage on a rental home.

The biggest influences on your credit score are your payment history and debt load – together, these two components account for 65 percent.

Lesser influences include the length of your credit history and the age and mix of your credit accounts.

Maintaining a credit score of 720 or higher can help you to qualify you for a low interest rate on your rental home mortgage. Below that, lenders may charge you a higher interest rate.

Credit Report

In addition to checking your credit score, lenders examine your credit report to gauge your readiness to repay your mortgage debt.

All lenders use information from at least one of the three national credit reporting bureaus: Equifax, TransUnion, and Experian.

If your credit report reveals that you have liens or judgments against your name, you will need to pay these off in full, or negotiate a payment plan with your creditors, before obtaining a mortgage.


The maximum loan size for a rental home is linked to the income you expect to receive once your rental home is tenanted.

Lenders typically require your potential rental income to be 25-30 percent higher than your mortgage payment.

They may also request proof of your personal income and cash reserves to ensure that you have sufficient funds to cover any void periods – times when your property is untenanted or rent is not paid.

Employment History

Rental home mortgages are a serious financial commitment and lenders rely on a stable employment history to determine your ability to make your repayments on time.

Most lenders require at least two years’ verifiable work history, as well as proof that your employment is likely to continue for a minimum of three years.

Lenders verify your employment history by checking with your current and past employers and/or requesting pay stubs and tax returns.

If you are self-employed or work on commission, lenders may ask for at least two years’ worth of accounts to substantiate your employment history.

Debt to Income Ratio

Most lenders require that your debt be no more than 30 percent of your income. This is your debt-to-income (DTI) ratio. The higher your DTI ratio, the more interest you will pay on your rental home mortgage.

If your DTI ratio is too high to qualify you for a mortgage, consider paying off high interest debts to get below the required limits.

Down Payment

Rental home mortgages often require larger down payments than conventional mortgages to compensate for the risk of void periods.

Most lenders request a down payment of at least 15 percent of the loan amount. A higher down payment may be required if you are a new investor and/or you have a credit score below 620.

Understanding the requirements for a mortgage on a rental home is an important first step in the buying process.

Knowing that you meet the requirements can boost your confidence and make it easier for you to negotiate with lenders.

Where Do You Go to Get a Mortgage Geared Toward Rentals?

If you have a rental property and want to expand, or you need financing for your first investment real estate purchase, a mortgage is usually the best way to obtain the funds.

Mortgages for rental properties work a bit differently than loans taken out for a residence.

Not all banks offer extensive financing services for prospective landlords, so you need to know the questions to ask and what you’ll need to close the deal.

Defining the Different Types of Lenders

Banks usually have two different ways of offering financing for investment properties: direct loans and underwriters.

Working with underwriters means that a third party looks at your financial portfolio and determines your ability to repay the loan.

An underwriter may or may not have much experience in the rental market and can pull out of the deal at any time.

A sudden loss of financing can leave you struggling to close on time.

With direct lending, the bank agrees to finance your mortgage.

There is no third party involved in the process, and you can talk directly to the decision-makers along the way.

The more communication between you and your lender, the more likely you are to get through escrow and closing with no hassles.

Loan Limits and Documentation

For a personal mortgage, you need to show proof of income and have a reasonable credit score.

In most cases, you’ll need to show at least two years of W-2s, though you may be able to use copies of your tax returns if you are self-employed.

The same is true to qualify for a mortgage on rental properties.

Some of the biggest differences in the requirements for a mortgage on a rental property come into play when you have multiple properties under lien.

Fannie Mae allows real estate investors to sign up to 10 loans for investment properties.

Most banks limit lenders to four simultaneous mortgages.

For the first four, the requirements are fairly standard.

You must have a credit score of at least 630, and you also need a fairly hefty down payment, typically around 20 percent.

Of course, if you have a credit score closer to the bottom limit, you are likely to pay more for the same financing.

After you sign for the first four mortgages, the credit score requirement jumps up to around 720 and the down payment to 25 percent.

Documenting Your Cash Reserves

Another issue when looking for a mortgage for a rental property is your cash on hand.

Most lenders want you to have at least six months of operating costs per property.

Having that much of a reserve ensures that your lender will still get paid if you experience extended vacancies or need to do major property maintenance.

The more cash you have on hand, the more comfortable lenders are issuing you a loan.

If you don’t have the necessary cash reserves, you might find other investors to help land you the financing.

Closing the Loan

As with any mortgage, large banks often have financing options available for prospective landlords.

Be sure to talk with a lender, not a broker, whenever possible.

A lender is a direct path to financing; a broker is just a pass-through between you and the lender.

Shop different banks and check to see if they have an investment branch.

That can save you a lot of hassles as you work to line up funding. It’s always best to work with a lender that is used to issuing mortgages for landlords.

Mortgages on Single-Family Rentals vs. Multi-Family Rentals

If you’re planning to invest in rental property, you have the option of a single-family rental or multi-family units.

Obtaining a mortgage will have similarities and differences, depending on which path you choose, and it’s important to understand those differences before commencing to make the loan process as straightforward as possible.

The Differences in Multi-Family Rentals

A single-family residence is a property that houses only one family; for example, a detached house is a single-family property.

Multi-family properties are more complicated, and for financing purposes, they are broken down into residential and commercial properties.

If you have four or fewer units in your property, you should know it’s considered a residential property; this includes a duplex or triplex.

More than four units in one property is deemed to be a commercial property, and apartments and condominiums are included in this category.

Financing for Residential Multi-Family Properties

Financing a property with four or fewer units is considered a residential loan, and it operates much the same as a single-family property purchased for a rental unit.

If you plan to live in one of the units and rent out the others, you can apply for an FHA loan.

You’ll likely have a large cash reserve requirement and may be limited to how much of the rental income can be included in the income qualification. The benefit of this loan is a lower down payment with only 3.5 percent required.

If you don’t plan to live in any of the units, you’ll need to seek out a conventional residential loan; regardless of whether you want to purchase a single-family property or multi-family home, you have a limit of 10 for Fannie Mae.

Of course, many lenders impose even stricter regulations, often capping out a four.

Whether you have four single-family dwellings or four multi-family properties, your restriction would be the same, but the income received would be quite different.

Your credit score is a significant factor when purchasing rental properties, just as if you were buying your own personal residence.

However, the requirements become even stricter when you are purchasing more properties; the first four loans require you to have a credit score of 630, while any loans over that amount will only be approved with a credit score of at least 720.

The requirements for down payments go up with a higher number loans, especially if they’re multi-family dwellings.

For loans above four with Fannie Mae on single-family properties, you’ll need 25 percent down, while the first four loans only require 20 percent down.

Multi-family property loans require at least 25 percent for all, and many lenders set even higher terms.

Commercial Multi-Family Property Loans

If you plan to purchase a property with five or more units, you’ll need to apply for a commercial loan.

This type of loan has a different set of requirements, often requiring the borrower to have some experience in property management. They’ll also have to provide a copy of the rent roll along with their own personal income information and business tax returns.

Lenders will look at the net operating income and how much cash flow the property has in relation to its debt, and the borrower will be required to have at least 25-30 percent for the down payment.

Multiple loan products are available, just as with residential loans, and they may be long-term or short-term with five to 10-year terms. The interest rates may be either fixed or variable, or they may start out fixed for a specific term and then adjust at the end of the period. In general, commercial loans are more expensive than residential loans, but they are also usually allotted for a higher amount with many loans originating for several millions of dollars.

Most property owners who choose a commercial loan will purchase the building as an LLC or limited liability corporation, which limits the liability on the owner or owners, providing them some protection of their own personal assets.

They will need to provide a lot more documentation than on residential loans, and they may be requested to include photos of the property, the description, floor plans, listing of current rents and expectations for raising or lowering them, and even information about competing properties within the vicinity.

If the owner has plans to upgrade the property, this intent will also need to be included along with the costs for these changes.

Most beginning landlords will apply for a residential loan until they have proven experience in the business. The key for any loan on an income property is to find a lender who is experienced in investment properties, which helps ensure a smoother process.

Anyone who plans to enter the rental property industry should consider long-term goals, whether they want to tie up their loans in single-family properties and limit their income or purchase multi-family residences.

No matter what type of rental property you intend to purchase, you should find an experienced lender to guide you through the process and work with a real estate agent who has experience in this area.

Rely on their expertise, and do your own research to be prepared, since this will eliminate much of the hassle and ensure the end result is you becoming the owner of your own rental properties.

What to Consider When Selling a Rental Property

For whatever reason, you have decided to sell your rental property. While this may be a sound business decision, you have a lot to consider before you begin the process or sign the final closing papers. Do it right, and you won’t have any regrets.

Informing Your Tenants

If your property is occupied, you will have to inform your tenants at some point. In multifamily units, it may not be a big deal.

Chances are pretty good your buyer will continue to maintain the property in the same way and keep the same tenants as long as they are current on their rent.

Things could be much different in a single-family dwelling where the buyers could want the home for themselves.

In this instance, you have to give your tenants an appropriate amount of notice.

A side benefit is that your tenants may be interested in buying.

If you can offer incentives, such as paying part of the closing costs, you may discover a buyer.

Otherwise, you may need to provide 60 days’ notice to be fair, even if the law in your state only requires 30 days.

Showing the Property

To sell the property, you will have to show it to prospective buyers — another good reason to let your tenants know. You need to find out what times are convenient for them and plan appointments during those times.

Unlike homeowners trying to sell their own property, your tenants may not be as cooperative because it doesn’t benefit them for you to sell.

One way around this problem is to offer them an incentive.

Perhaps you offer to deduct an amount from their rent in return for allowing a certain number of showings per month.

Include one or two open houses in the deal, and you are more likely to get full cooperation if they agree.

Make the deal even sweeter by providing an added discount if they find the buyer.

This puts both of you on the same team.

Realtor or FSBO?

You will also have to decide whether to hire a Realtor or sell the property on your own as a For Sale By Owner.

While hiring a real estate agent puts another person in the mix, it can also result in your property selling faster and for more money.

The key is to hire someone knowledgeable about investment properties.

A real estate agent should know the legal details of selling an investment property.

However, you should also talk with your lender about any ramifications of selling your rental and find out if there are any prepayment penalties or other concerns.

Legal Advice

While many home sellers use an attorney when selling their homes, it is essential for a property owner selling a rental.

Landlord and tenant laws vary by state, and you should find an attorney experienced in rental matters to ensure you don’t break any laws and end up being sued.

Selling a rental property is a major decision.

You have to consider the tenants and all the legal issues that can result.

The best way to navigate through this process if this is your first time is by working with an experience agent and lender to help you make the right choices as you sell your property.

Low Cash Options for Investing in Real Estate

Traditional real estate investments typically require a considerable upfront investment.

Mortgages for rental properties require a 20 percent down payment.

When you don’t have the cash on hand, breaking into real estate investment might take a more creative approach to financing.

Consider these options to avoid the cash requirements or obtain the financing through different avenues.

Avoid the Down Payment

One of the easiest, though not the fastest, ways to get into real estate investment without a large cash down payment involves buying a house for occupation.

Owner-occupied mortgages have options that include a zero down payment.

In addition to the low cash requirements for this type of loan, you also avoid the added cost of mortgage insurance.

Mortgages on personal properties rarely require the owner to carry mortgage insurance.

When choosing this method, keep in mind there are some restrictions, including:

  • Property must remain owner occupied for a set amount of time.
  • Longer terms may lead to slower equity.
  • Zero down loans may not be available after the first home purchase.

In most cases, loan agreements require the homeowner to live in the property for at least a year before renting out the residence.

Some require three years or more, so be sure to check on the residency requirements before selecting a lender.

Also, be aware that first-time home-buyer programs are not available on a second property.

You might still be able to find a zero down loan, but you need to be prepared to pay closing costs.

Cut Down on Closing Costs

Becoming a real estate agent is one way to significantly reduce the amount of cash you need to invest in real estate.

As an agent, you can handle the property sale and avoid paying the commission to a third party.

By removing the cost of commission to an agent, you can drop the cost of closing the sale.

Private Money Is Always an Option

If you are asset-rich and cash-poor, you might look into private lending sources.

Soft money, funds obtained from friends and family, might help you get started if you can guarantee a reasonable rate of return.

After all, a guaranteed 6 percent on a loan is often better than what someone might be earning in a CD.

Hard money, or asset-based lending, for real estate is another option.

These relatively expensive loans work in the short term by offering a 65-80 percent after-renovation value limit.

For example, if you used a hard-money loan to buy a house at $60,000 and the expected value after renovations is $120,000, you could secure financing of up to $96,000.

That loan amount will likely come with a term of a year or less, several points and a higher interest rate, but it allows you to close the deal.

Then, after the renovations, you might qualify for a refinance loan at the same loan-to-value ratio, allowing you to switch to more traditional financing without the upfront cash investment.

This is a relatively expensive way to get the money you need, but it works well when you come across a severely undervalued property, or you have the experience to do the renovation yourself.

Investing Without Assets

When you don’t have the money to invest directly, you need to either be prepared to invest time or cut into your profit margins.

There are many ways to find the funds, but these are some of the most direct. If you have the time, consider buying as a personal buyer and renting after meeting the residency requirement.

If you want to jump right in, work with private lenders to get the financing ready and dive into repairs.

Either method can help jump-start your life as a landlord with little to no out-of-pocket cash.

Benefits of a Mortgage Broker

If you’re the DIY type, you may wonder why anyone bothers using a mortgage broker when they could just talk to lenders directly.

For some people, the direct path really is the best option.

The majority of new real estate investors, however, can benefit from working with a mortgage broker.

Here are four reasons you should consider using one.

1. Using a Mortgage Broker Can Save You Time

Comparing mortgage offers is one of the most important things that you can do when buying investment property, as people often find that they can find vastly different offers from different companies.

Some lenders may decide that you don’t meet their expectations, so they don’t want to give you a mortgage at all.

Other lenders, however, may decide that you’re just what they’re looking for, so they will give you a low interest rate.

This may sound ridiculous if you haven’t worked in real estate or finance before, but it’s actually quite common because lenders use different criteria to measure how risky borrowers are.

If you don’t use a mortgage broker, then you will have to fill out applications for dozens of lenders. This takes a lot of time, especially since each company has its own set of documents.

Using a mortgage broker makes this process considerably easier.

Instead of filling out documents for several lenders, you just work with one person.

You will still have to provide plenty of documentation to prove your creditworthiness, but you will only have to do it one time.

That’s a big time-saver when you consider that most lenders will want:

  • W-2 forms from the last two years
  • A copy of your most recent federal tax return
  • Recent paycheck stubs
  • Canceled checks showing you have made rent and mortgage payments on time
  • A complete list of your assets and debts

If you own a business, then you will also need to supply loss and profit statements from your 1099 forms.

Renting property counts as owning a business, so you will need to give the lender this information if you already rent a property to tenants.

You will likely save hours of research on this issue by working with a mortgage broker.

2. Brokers May Have Access to More Loan Options

When you approach a lender, your loan officer will make certain assumptions about what you qualify for.

Even if you have a good credit history, the lender may choose to show you certain types of loans over others.

Mortgage brokers have enough experience to know what types of offers you can potentially use.

They also know what types of products lenders offer other clients. That could make it possible for you to access more loan options. They may not fit your needs, but at least you will get to consider them.

3. You’ll Likely Get Lower Interest and Other Costs

Since mortgage brokers have connections to a lot of lenders, they can often find loans with lower costs than the ones you would get by going directly to your bank. Having the option to look at more offers gives you an opportunity to lower the overall cost of borrowing money.

Lenders are also more likely to lower their interest rates and closing costs when working with brokers.

The lenders, after all, know that most mortgage brokers will work hard to find the best options for their clients.

This encourages lenders to compete with each other.

If they don’t lower their costs, then they aren’t likely to get much business from the broker.

In the long run, they can make more money by lowering interests, points and closing costs because that means the broker will get them more business.

Some real estate buyers worry that they will end up spending more money by using a mortgage broker. After all, the mortgage broker has to get paid.

However, this is unlikely to happen, especially since new regulations that went into effect in 2014 prevent brokers from making more money by selling expensive mortgages to their clients.

The new rules have also decreased the number of mortgage brokers. Considering that those brokers left the industry because they could only make good incomes by fleecing their clients, you should consider that a benefit.

4. A Mortgage Lender Can Give You Expert Advice

All investments come with some level of risk. Rental properties aren’t excluded from this.

Considering that you will likely spend $100,000 or more on your investment property, you will probably feel a little nervous about it.

Even if you know you can make money from the opportunity, it’s scary to hand such significant savings over to someone.

A mortgage lender can give you expert advice that will help you avoid common mistakes, and if nothing else, a good mortgage broker will help you feel more at ease. Sometimes, that’s all you need to move forward with an acquisition that will earn you steep profits.

Mortgage brokers aren’t right for everyone.

If you have a lot of experience in real estate and finance, then you may feel that you can do the job well on your own.

For most people, though, a broker offers experience and advice that can help them make smarter decisions when buying investment properties.

Interest Rate Outlook

Real estate investment is heavily tied to and dependent on lending interest rates, so a rate hike could unlock the door to lower property prices.

When rates go up, so do monthly mortgage payments, making it more difficult for you to find properties that will generate positive cash flow until prices correct for the new market.

When rates drop dramatically, more people buy and fewer people rent.

It can also drive up property values, as home buyers often look at the final monthly payment, not the price of the property.

With that in mind, it is crucial to keep an eye on mortgage interest rates when investing in real estate.

Recent Interest Rates

Since 30-year mortgages have the longest recorded history, you’ll want to look at this number to get an idea of what interest rates are doing and to follow trends.

In October 1981, according to Mortgage News Daily data collected on Freddie Mac, interest rates hit an all-time high of 18.45 percent. Since then, they have been on a fairly steady decline with a few peaks along the way.

In 2010, rates on a 30-year fixed mortgage dropped to 4.23 percent with fluctuations up to a little more than 5 percent the following year. After the increase, interest rates dropped again.

Where Interest Rates Are Today

Today, interest rates are almost back down to the incredibly low rates of November 2012.

Rates are holding steady at around 3.5 percent.

What is unusual is the length of time rates have remained low. For the past six years, interest rates have been at or below 5 percent, with typical rates sitting below 4 percent.

Why Have Interest Rates Stayed So Low?

The Global Financial Crisis, also known as the Credit Crunch, hit in 2007, leading to thousands of foreclosures, bankruptcies, and a long recession.

To help combat the effects of the recession, the Federal Reserve Bank responded by lowering interest rates to help spur economic growth.

With the economy in a slow but relatively steady period of recovery, these historically low interest rates may not last for long.

Low Interest Rates and the Real Estate Market

The GFC hit real estate hard. Creative lending tactics led to the issuance of many adjustable rate mortgages with balloon payments.

When homeowners failed to make the payment or refinance the loan, many lost their homes.

While this was tragic for the individual, it opened up a wealth of possibilities for real estate investment. After all, a flood of houses hitting the market depressed property values from the sudden highs seen leading up to the GFC.

Combined with low interest rates, investors had a sudden opportunity to expand their property portfolio at a time when more people needed to find rental accommodations.

At the same time, loan regulations became more strict, making it harder for lenders to find qualified buyers.

Those real estate investors with a higher credit score faced less competition for desirable properties. When fewer borrowers qualify for a mortgage loan, it reduces the number of offers per property.

Enter Government Mortgage Programs

Falling mortgage numbers spurred government action in the form of a variety of homeowner grant and tax relief programs.

First-time home buyer programs were designed to help new buyers get into a home.

Existing homeowners were offered a half dozen different programs designed to help them afford their existing mortgage or refinance to get out from under water.

Foreclosure rates are now at an eight-year low, bringing up the question of an interest rate increase.

Will Interest Rates Go Up?

Interest rates are cyclical.

Rates go down, and then they go up. The only real question is when, not if, the rates will rise.

The Federal Reserve did put through a small increase to the prime rate, but that does not directly impact mortgage rates. These are more closely tied to bond activity.

Also, as long as the Federal Reserve continues to buy up mortgage-backed securities, it is likely that mortgage rates will remain low.

Low Interest = Higher Prices

Even if the mortgage interest rates do start to rise, that may not be a bad thing for you.

If you plan on buying into real estate, a rise in rates usually translates into a drop in prices.

Buyers tend to look at the bottom line, and what they can afford on a monthly basis is limited.If rates go up and prices stay high, properties fail to sell.

Sellers may not move on the price right away, but, eventually, higher interest rates will drive down prices.

Why Higher Interest Could Mean Better Real Estate Returns

When you are buying real estate as an investment, the goal is always to buy at the lowest possible price and sell at the highest.

If high interest rates drive down property values, you could pick up some units at well below the current market value. Then, when the rates fall again, driving prices back up, you are in a prime position to sell at a significant profit.

When to Look for Rate Hikes

Experts predict that interest rates will stay fairly flat until 2019.

Increases will be phased in slowly, so if you watch the market you should see the trend.

When rates get up above 5 percent, it might be time to start looking for discounted properties.

Of course, if the market pushes back against the increase, you might see rates drop right back down.