Have you ever thought about purchasing an investment property? Investing in real estate is becoming increasingly common and it is apparent why.

Real estate investing can result in a supplemental steady income that you can count on.  The rent that you receive from your tenants should cover your mortgage, so you get a free house out of the deal, in addition to monthly cash flow.

However, before diving into investing there are some calculations that need to be completed and preparations that need to be made as this significantly differs from purchasing a regular home, especially from a mortgage standpoint.

 

Down Payment on an Investment Property

Down payments on investment properties are generally larger than regular homes.  However, one way that you can maintain a low down payment for an investment property is if you purchase a multifamily and live in one of the units, making the property your primary residence.

For a primary residence, conventional loans generally require a 5% down payment while the down payment for FHA loans is 3.5%.

There is more risk involved in buying an investment property that you are not residing in.  For this reason, a down payment of at least 15% is required for a single-family and 25% for a multifamily that has between two to four units. All residential lending ends at four units so you cannot buy a property that has five or more units with a traditional residential loan, that goes into commercial lending.

 

Multifamily Requirements

Multifamily properties often have reserve requirements.  Reserves can include anything that you can withdraw money from at-will.  This can include a 401K, CD, IRA, or savings.  The reserves do not get spent in the home purchase transaction. The only money that is spent is the down payment and closing costs. Although the reserves are not utilized, they must be fully verified.

When using a 401(K) as your reserves, the terms of withdrawal must be provided as the requirement is that you must be able to withdraw money when you need to.

The reserve requirement for multifamily investment properties is generally 6-12 months’ worth of payments for that property, in addition to every other mortgage you have. Unlike a regular house, you cannot obtain gift funds from a family member for an investment property and designate it as reserves. Gift funds cannot be utilized at all in an investment property purchase as an investment is predicated on the fact that you are monetarily self-sufficient enough to purchase an extra house for additional income.

 

Mortgage Tips for Real Estate Investing

Many times, those purchasing an investment property or multiple investment properties refinance one of their other mortgages to use as a down payment towards another house. You can cash out on up to 75% of the home’s value for a single-unit property. For multi-unit property, you can cash out up to 70% of the home’s value.

It is also important to note that you have other options outside of a conventional mortgage for an investment property. We have a Debt Service Coverage (DSCR) loan which is an Investor Cash Flow loan.  This loan requires the rent that the tenant(s) pays needs to cover the mortgage with a 1:1 ratio.  Therefore, if the mortgage is $1,000 per month, you must receive at least $1,000 in rent.  This is an attainable requirement as you would likely not choose to invest in a property that will not allow you to at least break even. If this 1:1 mortgage to rent ratio is met, then there is zero income required to purchase the home.  The only other qualifications needed is a good credit score, generally over 680, and having at least 12 months prior experience as a landlord in your lifetime.  This mortgage product is especially helpful for self-employed people that do not have enough income to show on their tax return.

All in all, there are a lot of interesting strategies that can be implemented to purchase a rental property, and it is generally not as complicated as it sounds. There are some factors you should be conscience of such as ensuring your credit score and reserves are at a sufficient level.  From there, you can start looking at purchasing a rental home anytime!

Get in touch with our mortgage experts today to learn more about becoming a real estate investor.