What is a better investment than your home? Depending on where you live, you are pretty assured that most of the money you put into a house will increase and give you a better value than just about any other investment you can make. If owning a property you live in is a good investment, why not try an investment property (ie one that you don’t live in, but rent instead)? If you are thinking of owning a home for investment reasons, make sure you know everything you can before taking the plunge.
When it comes to buying an investment property, the rules for buying are different than if you are purchasing a primary residence. The main difference is programs and their guidelines are different for an investment property versus a primary residence. You should expect to pay at least 20-40% of the value of the house. There are a few exceptions, and for those, you should speak with your lender for information on that. Because you are paying a higher down payment, you won’t have to pay mortgage insurance, which can be an advantage over the long term of the loan.
Banks treat investment properties differently than a primary residence. It makes sense from their perspective because they don’t have as many assurances that the investment house will be given the same care as a primary residence. They may have multiple owners renting, or being used for other purposes and because of that, they might not treat the home as an owner would. Because of this, lenders usually require more money up front. They will more likely charge a higher interest rate as well.
Creditors are more cautious about lending money for investment properties due to the variables and risk levels of these types of transactions. If a borrower has a mediocre credit score (generally below 740), then lenders will often charge them quite a bit more in interest rates, lender fees and lower loan to values (LTV’s). In fact, if you do have a lower credit score, it may be better to look for options other than a conventional loan.
Getting a mortgage for one house is hard enough, especially after the recent housing crash. They are becoming stricter with their guidelines so they can protect their investments. When someone has multiple mortgages, banks start looking even more closely at a borrower’s credit. In general, banks won’t look at an applicant that has more than four mortgages. Make sure to talk to a professional to give you advice on how to work with lenders with these issues.
When it comes to the best form of payment on a home, cash is always king. The more liquid the better. Having cash will save you the interest on the loan as well as a lot of fees associated with setting up a loan. Also, if you are in a competitive situation on a property, a cash offer will almost always put you over the top against a competitor.
Investment properties can be a great way to supplement your income, or even become your income. Just make sure you know all the facts before diving in head first, so you can be ready for all the things you are dealing with.