Purchasing an Investment Property with a Loan

Here at MomVesting, we're introducing a huge new series about non-traditional investments. These non-trads cover everything from investing in others' business ventures to investing in blogging to purchasing investment properties. We hope you'll join us as we move along in the new large investment series on Mondays!

As we move forward in this large series, we are focusing first on investment properties. And now that we've discussed some details about investment properties and the landlord gig, it's time to get down to the nitty gritty about the finances. We'll go over some basics here, and then we'll encourage you to discuss your own details with a financial institution. So let's get started!

Purchasing a Multi-Tenant or Apartment Building

Although we won't be focusing on the multi-tenant investment gig, let's touch on it briefly. First, it's important to note that you may need to dive into some intense financial and business details in order to obtain a loan. This is because properties with more than three units are often considered commercial properties, which means they are subject to additional legal details, zoning and banking regulations. Of course, laws vary by location, so check with your local commercial banker or lawyer to find out the details in your state.

There are a ton of details to consider in the multi-tenant investment, but we won't focus on multi-tenant loans here. Instead, since most first-time investors prefer to invest in single family home (SFH) investment properties, let's move along to the SFH and duplex details.

Purchasing a SFH or Duplex

If you've already purchased an owner-occupied home, you'll be familiar with many traditional mortgage details. These same details prevail in the SFH investment mortgage, but the rules are often a little different. For example, most banking institutions will require a larger down payment and additional cash on hand in your banking account. Depending on your loan, you may also be required to provide additional proof of employment, extra banking statements, more tax return documentation, your firstborn child...okay, maybe not your firstborn, but you get the idea: mortgage regulations can be more stringent in the purchase of an investment property.

Even though many of the details can vary by loan type, the financial details tend to be similar. This means that the larger down payment and cash on hand in your banking account will often be huge keys to landing that mortgage. Most loans require 20 to 25% cash down and a cushion in your bank account to cover at least a few months of rent (should a tenant leave or be evicted). You may also be subject to paying additional points when purchasing an investment property. The exact amounts of cash down, cash cushion and points charged varies by your loan type, location, credit rating and other details.

Talk to a Mortgage Banker

Since so many details vary within the mortgage banking world, it's often a good idea to sit down with a mortgage professional to get pre-approved for a loan before you go too far in your purchase. This way, you can find out the details needed for your particular loan type and situation before you put in an offer on a home. This can save both time and headaches – and if you don't qualify, you can work toward beefing up your savings based upon what the mortgage banker tells you.

So that's it: the main details behind an investment property purchase. Basically, the big thing to remember is that you'll probably need more cash to purchase an investment property than you would in the purchase of an owner-occupied home. Check with your mortgage broker today about the exact details in your scenario!

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Anonymous's picture

AverageJoe wrote:

Thu, 10/18/2012 - 22:19 Comment #: 1

Great tips here. My father in law built some wealth by buying a duplex as their first home. They lived in one half and rented the other out. The rental income nearly covered his entire mortgage at the time, so he was able to live for next-to-free.

The bad news? He had to deal with tenants next door who knew the landlord was next door and a really nice guy.

Christa Palm's picture

Christa Palm wrote:

Fri, 10/19/2012 - 13:07 Comment #: 2

Joe, it's great to live in half of a duplex, too, because the bank then considers it owner occupied -- no points to pay!

Anonymous's picture

femmefrugality wrote:

Sat, 10/20/2012 - 02:22 Comment #: 3

I had no idea about any of this...even the downpayment! Great info!!

Anonymous's picture

Miss T wrote:

Sat, 10/20/2012 - 21:57 Comment #: 4

You have dangled the bait Christa. My hubby and I have talked about investment properties as an option. Thanks for all of the details.

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