You have owned your house for a while, and have thought long and hard about buying an investment property. Are you ready to take the plunge and be a landlord? How would the mortgage on an investment property be viewed differently than that of the house you live in? What options exist for investment properties and how do you know what the right choice for a mortgage is? Let’s chat!
To start with, are you going to be buying for cash flow or are you going to be buying for equity gain? What is your exit strategy? I know this may be a hard question to answer. You don’t own the property so how are you supposed to know when you are going to sell it? But this is something you will need to think about for your future. Are you going to be a value investor, holding the property long-term? Are you looking to speculate and sell in a period of time based on facts you know about an area? Do you want something you can do capital improvements on, and increase rents to gain equity?
The reason all of this is important is that it starts there when deciding on the optimal financing for the property. Those who know where they are going are more likely to get to their destination. Think of it as you are mapping out your destination and ultimately your future. More along those lines you need to be asking yourself; are you looking to buy condos to afford yourself a more passive approach? Or is single family your game? How about multi-family? Each of these property types have different requirements.
As an example, if you were to buy a 2-4 unit, you’ll need to plan on 25% down. Whereas, with a condo or single family you “technically” could put 15% down. Now, with 15% down it can become a thorny patch. You’ll have higher rates, and also PMI (Private Mortgage Insurance). That is why most lenders will reference and suggest 20% down on these property types. From there, you need to also budget for closing costs. Now, what if I told you that at 20% down you will get a worse rate than 25% down on a single family/condo? Would that be important to you? Maybe, but then again are you a value hold buyer or a speculator?
Part of the answer to that question may lie within the property itself. Does the property need improvements or is it turn-key ready? If it needs improvements, maybe that higher rate to afford you 5% less down is a fair trade-off for you. After all, if you put that 5% back into the property then maybe your rent goes up by $X/month based on your research. When would you recoup that rehab/renovation cost in higher rent? Or it could be as simple as you intend to rent to a certain demographic or have a rental in a certain part of the city. If that is the case, the property may need to be turn-key so you get the rent you desire.
In addition to down payment, you’ll need to have savings to support vacancy. Not just for yourself. But the servicers require you have savings, called reserves. How much? Depends on how many properties you own and what the unpaid principal balance is. So plan on having a cushion in addition to down payment and closing costs. Keep in mind reserves don’t need to necessarily be liquid. These can be in the form of retirement, stocks, IRA’s, etc. Though lenders don’t count 100% of the value of your retirement accounts towards reserves.
So whether you are looking for a condo, single family, 2-4 unit, long-term or to speculate you’ll first want to know how much capital are you working with. From there, deciding on the right mortgage for your investment property purchase is a composite sketch of the picture you want to paint. Talking with an experienced lender who is familiar with investment property financing is extremely important and should be mandatory. Not all lenders are created equal so equipping yourself with someone who is experienced and knowledgeable is key.
Article Provided By:
Ray Williams-NMLS #216267
Branch Manager @Mortgage Maestro Group