Buying investment property can come with challenges, such as maintenance costs and tighter financing requirements, including higher interest rates and a larger down payment compared to mortgages on primary homes. Investment properties require a much higher level of financial stability than main houses, especially if you plan to rent the house to tenants. Most mortgage lenders require borrowers to have at least a 15% down payment for investment properties, which is generally not required when buying your first home. In addition to a higher down payment, investment property owners who move tenants must also have their homes authorized by inspectors in many states.
Investing in rental properties is a strategy that involves buying properties that are rented, which gives you monthly income. For a property to have positive cash flow, rental income must exceed all costs of owning and maintaining it. There are several ways you can invest in a rental property. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions achieve financial freedom through our website, podcasts, books, newspaper columns, radio programs and premium investment services.
Once you have sufficient net worth in your home, usually between 15% and 20%, you can apply for a home equity line of credit. Depending on the amount that is approved, you can buy an investment property directly or you can use HELOC money as a down payment on a property. If you are going to use the HELOC for a down payment, you may not have cash flow until you pay the HELOC. You'll have to run the numbers to decide if the deal is worth it.
Suppose you are currently renting a single-family home. You can ask the landlord if they are interested in selling the house to you. If you've been paying rent faithfully, the landlord knows you have the means to make the deal. A real estate lawyer can draft a promissory note, used instead of a mortgage, that lists the terms of the agreement.
You'll probably have to give the landlord a down payment of around 10% of the home price to close the deal. The landlord will also likely expect payment on the home in about five years, but the payments would pay off, usually by age 30. You would then get a mortgage to pay the balance. The 3% you may have bet on the house you currently live in will not work for an investment property.
But how can you know which areas will become the next best places to invest in real estate? The only way is to look at an area's real estate market indicators and rental trends over time and compare the direction of previous property prices and taxes to where they are now. Get approved by Rocket Mortgage and you'll be on your way to buying your first investment property. When you want to invest in real estate, it's possible to buy a property even if you don't have the cash. It's that powerful combination of tax benefits and investment returns that helps keep investors interested in rental properties.
If you've been watching reruns of HGTV's “Income Property” and wondering if it's time to buy an investment property and become a homeowner, you're not alone. I often see investors focusing on the listing price of active offsets (similar properties currently on the market for sale) when estimating the value after repair of a property. If you're intrigued by the idea of investing in rental properties but don't want to worry about fixing toilets in the middle of the night, check out Roofstock. After refinancing, investors can use cash-out refinancing of their first rental property to finance the purchase of their second rental property.
House hacking is a common investment method that involves converting a single-family residence into a multi-family residence by renting a portion of the property to tenants. Although it's difficult, buying an investment property isn't impossible, and you'll likely find it's worth the effort. With a little financial creativity, you can easily buy a rental property and start enjoying all the benefits of the investment. Mortgages and investment property loans, such as an unowner-occupied mortgage, work a little differently than personal housing.