Purchasing an investment property can be a smart financial move for homeowners approaching retirement or anyone wanting to supplement their income. But acquiring a home for investment purposes isn’t the same as buying your primary residence: What you know from experience with mortgages is helpful, but there are additional factors when it comes to investment properties. Check out these tips before you start shopping.
Save up for the down payment. You can’t obtain private or lender-paid mortgage insurance for investment property purchases, so you’ll need at least 20% of the purchase price as a down payment. Plus, with an investment property mortgage, it’s also a good idea to save up a respectable sum of money for purposes of interest rates. If you can manage to put down at least 25%, you could qualify for lower rates to reduce your monthly payment.
Stay on top of your credit rating. Many factors will impact your ability to obtain a loan for investment property, but among the top considerations a lender will look at is your credit score. Make sure to get a copy of your credit report before approaching lenders, and correct any errors or fix negative items. If your score is below the mid-700 range, you may be paying higher interest rates for an investment property mortgage.
Make sure you have enough cash on reserve. When you purchase real estate for investment purposes, you probably expect to have a certain number of tenants in the units. This may not always be the case, so it’s important to have enough reserve cash that you can rely upon for personal and investment-related costs. Plan to have about six months’ worth of cash on hand per property – not including rental income. When you have enough in savings, you’re not in a tough situation if you have too many vacancies or tenants fail to pay rent.
Stay away from the big banks. You might want to steer clear of larger, national lenders if you have a low down payment, credit less than the mid-700s level or other unique circumstances. Local banks are often more flexible in their loan requirements and are willing to work with real estate investors. Plus, their loan officers have a better view of the local real estate market and trends that big banks don’t consider. Many are also willing to keep money in the local economy.
Consult with professionals on an investment property mortgage. When you purchased your primary residence, it’s likely that you worked with a realtor and lender – perhaps even an attorney for certain transactions. Now that you’re purchasing real estate for profit, you should rely on the expertise of professionals in obtaining loans for investment properties. Certain lenders have more experience in mortgages for rental properties and can help you work through the process.
These tips on mortgage loans for investment properties should help you decide whether to go forward with the process. There are certainly advantages to real estate as an investment, but it’s important to understand these arrangements and how they differ from purchasing a primary residence. Talk to a mortgage equity specialist to see if investment property is the right move for you.