Things to Consider When Purchasing Investment Real Estate

Investment Purchasing of Real Property

So you want to invest in real estate to rent out to others? Over an extended period, which is what you look for when investing, you want to invest your resources in something that will grow in value. Most material things you purchase will decrease in value over time. They say a car depreciates in value when you drive it off the lot. A sound investment with a financial planner, and hopefully the retirement program your employer invests your 401-K funds in, will, over time, increase in value. Real estate has also done a fairly good job of holding value or appreciating. Real Estate investment is not necessarily a fool proof bet.

I made quite a few loans lately to people who were first time home buyers a couple of years ago that purchased a home with very little of any investment in their own funds. Their starter home had increased in value over the past two or so years to the point they were able to sell it, cover their selling expenses and have a decent down payment to move up to their next home. Historically their have been time periods where the expanding bubble of increasing values popped and home owners owed more on their property than they could sell them for. Be as informed as possible before purchasing.

Here are some of the things to consider when thinking about investing in real rental property.

Percent down payment required:

  • You can purchase a single-family home with as little as 15% down payment.
  • You can purchase a two, three, or four-unit property with as little as 20% down, unless you intend to live in one of the units yourself and not rent it out.
  • The interest rate on all investment properties is substantially better when you put 25% down. You want to weigh the advantages of a lower rate with more of your own cash invested in the purchase.

Underwriting guidelines with investment purchases.

  • Underwriters are going to be even more diligent in reviewing an applicant’s willingness and ability to repay the loan because the loan is considered higher risk.
  • They changed the requirement that an applicant have a successful history [at minimum one year of reported income on  Schedule E of your income taxes] of renting real property as a condition to purchase investment properties. Now, with a lease in place, you can add a percentage of the rental income into your overall income to show repayment ability for the investment property mortgage. The current owner can assign the leases in place over to you to meet this requirement.
  • Some investors may require a higher credit score to obtain loan approval than if you were buying a property for your primary residence.
  • Government loans are typically for primary residences and many lenders don’t provide conventional loans on investment properties, so your funding is more limited. However, we provide conventional loans for investment properties.
  • When considering purchasing a property with more than 4 units or after you have around 10 units owned, then you are likely to move form residential financing from a mortgage lender to looking at commercial loans which often have shorter payment terms and even stricter underwriting guidelines.

Investing in real estate can have some very sound long term benefits. And if you don’t have handyman skill yourself, you may also need to factor in the costs of repairs and if you are short on time, you may have to consider paying a management service fees to help you. Buying your first investment property and learning the ropes for a few years can be a great way to get started. I’ve seen several people begin this way and when they have built up enough equity in one property, cash out some of the equity to use for down payment on the next one.

If you think this may be the next move for you, and you are interested in purchasing investment property in Ankeny, Des Moines or Ames, give Dorothy Mathis a call at 515.327.9938 for an appointment to discuss.