Have You Considered Buying a Second Condo to Rent Out?

A client recently asked for help analyzing an investment opportunity: their neighbor was moving, and they wanted to buy the condo and rent it out. It’s a win-win: the seller avoids transaction costs and doesn’t have to prep the condo, while the buyer can purchase at a better price and secure an investment property just a few floors away.

The investment analysis was simple: compare expected rents to known expenses. The real challenge was financing. How does it work for a non-owner-occupied condo? How much do you need for a down payment? Would the condo association approve it? And would the bank lend you money? Financing a non-owner-occupied condo involves several key details.

Mortgage Details for Non-Owner-Occupied Condos

• Down Payment & Terms: Expect a larger down payment, higher interest rates, shorter amortization, and a variable rate.
• Required Reserves: Banks require 6 months of PITI (principal, interest, taxes, insurance) in reserves, which can be in a 401(k) or similar accounts, not just cash.
• Typical Loan Terms:
  • 20%-25% down payment
  • 25-30 year amortization period
  • Interest rate 0.5%-1.0% higher than owner-occupied loans
  • Variable rate after 5 years
• Rental Income Adjustments: Banks reduce rental income by 25% for vacancies, collection loss, cleaning, maintenance, management fees, repairs, and capital expenses.
• Debt-to-Income (DTI) Ratio: The bank typically requires a DTI ratio below 45%. They’ll run a pro forma on the new property; if it’s positive, they’ll add rental income to your income. If not, they’ll increase your debt obligation by the shortfall.
• Debt Service Coverage Ratio (DSCR): A minimum DSCR of 1.2x is required (Rent – Expenses) / (Principal + Interest).

Financing Considerations

• Owner-Occupied Units Requirement: Federally-backed mortgages require at least 50% of condo units to be owner-occupied. The Boston Assessor’s Office provides this data. If over 50% of units are owned by investors, the condo is “non-warrantable.”
• Non-Warrantable Condos: These properties are harder to finance and may not meet Freddie/Fannie guidelines, which apply to about 70% of all mortgages.
• Local Banks & Credit Unions: Portfolio lenders (like local banks) may finance non-warrantable condos, but it can be tricky.

Next Steps

1. Review Condo Documents: Check for restrictions on non-owner-occupied units.
2. Contact Lenders: Speak with a few banks about investment property mortgages. If they don’t offer them, ask about commercial mortgage options.
3. Ask About Terms: Inquire about loan-to-value (LTV), down payment, fixed vs. variable rates, amortization period, DTI, and DSCR.
4. Rental Income Considerations: Lenders often require at least 2 years of rental history for first-time landlords, so visiting a bank where you have an existing relationship may help.
5. Don’t Focus on Interest Rates: Terms often matter more than rates, and rates tend to be similar across banks.