Buying an Investment Property

It seems almost redundant. After all, isn’t every property an investment of some kind?

While that may be true, when it comes to obtaining a mortgage, the definition of an investment property, and the requirements surrounding its loan, are pretty clear.

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Living Rent Free With Investment Properties

One way new investors approach buying investment properties is to leverage the better loan rates that apply to multi-unit properties if you plan to live in one of the units.

If you take up residence on your property, and collect rents from the other units, you can usually pay your entire mortgage and cover upkeep of the property while living rent-free yourself. This is a great way to get into real estate investing.

Just don’t get in over your head, as you’ll be living in your investment, and if you lose it, you lose your home as well.

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Know Your Limits

Currently, Fannie Mae allows each investor to carry up to 10 loans at any one time. Taking advantage of the 10-loan limit requires a lender with the right experience.

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TermConforming 30 year fixed
Rate6.000%
APR6.227%

98004 | $800,000 | Credit Score 800+ | 25 Down

TermConforming 15 year fixed
Rate5.125%
APR5.493%

98004 | $800,000 | Credit Score 800+ | 25 Down

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Primary Residence vs. Investment Property

To put it simply, primary residence refers to a home occupied by its owner the majority of the year. When borrowing, the prospective owner will be expected to acknowledge this status on several loan documents. A home that’s classified as owner occupied may get a lower rate than an investment property.

An investment property is any home that is NOT occupied by the owner. It can, however, also be a second home or vacation home that is too close in proximity to the primary residence. Investment properties such as these pose a bigger risk to lenders and therefore carry a higher interest rate.

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Questions to Ask Your Investment Property Mortgage Lender-to-Be

  1. Do you currently work with active investors?
  2. What types of investment property loans do you offer?
  3. Do you offer rate locks, and is there a fee?
  4. What types of properties do you finance?
  5. What are the upfront and ongoing fees?
  6. How long does the loan process typically take?
  7. Who will be my point of contact throughout the process?
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Credit and Cash

Credit-qualification guidelines are NOT created equal. For loans 1 through 4, a minimum credit score of 620 is required. Loans 5 through 10 require a credit score of no less than 720.

There are also requirements when it comes to cash. In addition to the down payment, investment property mortgage lenders require 6 months of cash reserves available per property. In other words, if you own a primary residence and are buying an investment property, the lender will require you to have 6 months of mortgage payments (principal, interest, taxes and insurance) available for both properties.

For a better understanding of what it will take to purchase an investment property, ask your investment property mortgage lender for the estimated monthly payment. Or, use our Instant Rate Quote, available 24/7.

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Down Payment

As with credit-qualification, down payments also have two sets of guidelines. Loans 1 through 4 for a single-family home require a 20% down payment. Loans 5 through 10 require 25%.

For loans 1 through 10 pertaining to multi-family dwellings, a 25% down payment is required. It’s important to note, however, that many lenders require 30% after loan 4.

On a side note, refinance transactions for any investment property will require a 25% down payment.

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Benefits of Investing in Real Estate

Investing in real estate offers several perks, including the following:

  • Steady Cash Flow: Rental properties generate consistent income through regular rent payments, which can either cover or exceed operating costs.
  • Appreciation: Real estate typically increases in value over time due to market demand, inflation, and property improvements.
  • Tax Benefits: Investors can deduct mortgage interest, property taxes, insurance, maintenance, and depreciation, saving them on taxes paid. Plus, long-term capital gains are taxed at lower rates, and 1031 exchanges allow investors to defer taxes when reinvesting profits into new properties.
  • Portfolio Diversification: Adding real estate to an investment portfolio reduces overall risk.
  • Inflation Protection: Investing in real estate can hedge against inflation. Typically, as inflation rises, so do property values and rental rates.
  • Build Equity: Every mortgage payment builds equity, which can be tapped into through refinancing or home equity loans.
  • Tangible Asset: Unlike stocks, real estate is a physical asset that tends to retain its intrinsic value even during times of economic downturn.
  • Passive Income: Investors can earn income without daily involvement through the use of property management services.

FAQs

What types of investment properties are available?

Investment options include single-family homes, multi-family units, condos, townhomes, short-term rentals (ie. Airbnb), and commercial buildings.

What financing options are available?

Buyers can use various loan options, including conventional mortgages, DSCR (Debt-Service Coverage Ratio) loans, interest-only loans, and other non-QM loans.

What is a DSCR loan?

A DSCR loan qualifies borrowers based on the property’s income, making it ideal for rental investments.

What’s the difference between an investment property and a second home?

Investment properties generate income (ie. through rent), while second homes are for personal use and vacations.

How is rental income taxed?

Rental income is taxable, but owners can deduct expenses like mortgage interest, repairs, property taxes, and depreciation.

Can I buy an investment property through an LLC?

Yes, many investors use LLCs to buy investment properties for privacy, liability protection, personal asset protection, and tax optimization.

What risks should I consider when buying an investment property?

Consider risks such as market fluctuations, vacancy rates, maintenance, legal and zoning issues, and litigation risk.

Where are the best places to invest?

Popular markets include Seattle, Portland, San Diego, Boulder, and Boise.

States we lend in

Our loan officers are ready and waiting to help you apply for your home loan.

Need Financing?

We wish you great success with your home purchasing journey. For more information about our mortgage programs, or to find out how Sammamish Mortgage can help you with your investment property, we invite you to contact us today. As a Mortgage Company, we currently lend in the Pacific Northwest region, including Washington, Oregon, Idaho, Colorado & California.

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