Given the current real estate market, with an abundance of undervalued and distressed properties, looking into the purchase of an investment property might be a good idea.
Keeping in mind how these properties work from a finance perspective will help in the decision to purchase one.
What is The Strategy?
The three questions that a potential property investor should ask are:
- How much of a down payment is needed?
- How much of an investment will be required to get the property either rentable or resalable after purchase?
- What will the market bear in terms of either a rental rate or a sales price?
Investors should expect to have a down payment of at least 25% when purchasing a property. Rates are from 0.5% to 1% higher than those charged to purchase a home used as a primary residence, and you should expect to have at least six months of mortgage payments in the bank as asset reserves for each investment property that you own.
However, if you purchase a two- to four-unit property and intend to live in one of the units, the property will be considered a primary residence and financed accordingly. There are still premiums that apply for multiunit properties, but they are normally lower than those for investment properties.
On a mortgage application, rental income is typically calculated at 75% of the amount on the lease, to account for vacancies throughout the year. This difference in income will be made up by your personal income. If you have less than two years of landlord experience, you will not be eligible to use the rental income on the mortgage application and will need to cover that amount with your personal income.