Solano Real Estate Scene: Rental property mortgage rates higher than owner-occupied mortgages

Investors who own residential properties pay higher mortgage rates and closing costs on their rental properties than they pay on their owner-occupied home mortgages. The reason for the higher rates is because houses occupied by tenants are viewed as riskier for mortgage lenders. The tenant doesn’t have pride of ownership and could secretly have farm animals living in the bedrooms. The tenant could default on the rent, causing financial hardship for the landlord. The tenant could be like Michael Keaton in the psychological thriller movie, “Pacific Heights,” where Keaton, the tenant, terrorized his landlords, Matthew Modine and Melanie Griffith. In the event of a pandemic, the government could create and enforce a moratorium against evictions. Some investors overextend their financial capabilities and over-leverage their properties with debt or buy too many rental properties, and the minute a couple of tenants default or a recession pops up, the house of cards falls apart. Over the past 32 years in Vacaville, 90% of every rental property mortgage I have done was for financially savvy investor types with high FICO scores and good cash reserves who own and manage residential real estate as a way to diversify their retirement portfolio. The primary theory behind the higher rate for the increased risk probably goes back to the crash of 1929 when some wealthy individuals let all their rental homes go but held on to their family residence. Bankers figure a borrower will let their highly leveraged real estate investments go before they walk away from their home. This whole concept makes a lot of my high net worth and high FICO clients irritated. Most of the local successful old-time landlords who have tons of equity in their rental properties see this as just another way for mortgage lenders to make more money in fees and interest. In all fairness to these skeptics, they are correct: the bad apples ruin the barrel. In my 40 years, landlords who are conscientious, conservative, organized and manage their rental homes like a part-time business are substantially less risky than a homebuyer moving into their first home with little or no down payment.