What Additional Demands Are Required When Buying Investment Property?
It’s a fantastic time to invest in real estate, but what additional requirements might there be for qualifying for investment property loans?
Requirements of Investment Property Loans
Real estate investing has continuously proven to be one of, if not the best ways to augment income and wealth building. The returns can be great, and real estate offers plenty of tax saving benefits and security. In fact, legendary investor Warren Buffett has frequently, and consistently pointed to real estate as his best investments of his entire lifetime.
However, it is no secret that mortgage lenders frequently perceive investment property loans as being riskier than residential owner-occupied home loans. Their thought process is that in a crisis individuals would first let go of their investments, followed by second homes, and they by all means necessary try to hold onto personal residences. This means investment property loans can be slightly more conservative, and can require slightly higher demands in order to qualify for mortgages. So what are some of these items?
While some real estate investors find this quite irritating, it actually works to their own benefit. When applying for an investment property mortgage loan lenders will typically look for several months of liquid capital reserves to be held on hand by borrowers. This might range from a couple months to six months per investment property. This helps investors be prepared for vacancies and unexpected repairs. You’ll be glad you have them when these situations arise.
Down payments are typically larger when purchasing investment property loans. Expect to put down anywhere from 10% to 30% of the purchase price.
Newer real estate investors might find it wise to get a few properties under their belts before quitting their day jobs and going full time in real estate investing. This can help with qualifying for loans. Income from rental properties being purchased can be applied for qualifying for a mortgage loan. However, expect that the gross income will be discounted for vacancies, repairs, etc.
Experience can also be a factor. If you only own a $100k home and are trying to purchase and finance a $1M investment property, expect that to raise some eyebrows. Underwriters will be concerned about your ability to manage that much money and property. The same goes for attempting to rapidly finance multiple rental homes or rehab projects. However, as your experience grows you’ll build relationships and lenders will soon be throwing money at you.