Want to buy investment property? Financing Options 101

by Tony Hain on October 31, 2012

With interest rates at historic lows and housing making a comeback, we’ve had several clients ask about purchasing investment properties.  You won’t be surprised to learn that we think that’s an excellent idea.

However, if you don’t have deep financial pockets or a history as a landlord, it can be more challenging in today’s lending environment.

If you are buying a condo, or single family home as an investment property, you will need 20% down.  2-4 unit properties require 25% down.

The next big question is can you qualify for it without counting the rental income?  Can you carry two mortgages without tenants?  If so, you’re set.  If not, it gets a little complicated.

We spoke to Scott Davis at Prosperity Mortgage about this. And here’s his list of what it would take in order to use the rental income to qualify for the loan.

  • Proof that the buyer has a previous 2 years of experience as a landlord.  This is documented by seeing rental income on 2 years of tax returns.
  • The appraiser will do an income analysis of the market rents for the property.  This will be used to offset the new PITI (and condo fee, if applicable)
  • Copies of current leases, if applicable.
  • Two month’s PITI for both properties in reserves (can be retirement) after the transaction.

Scott added, “We have gotten exceptions to the two year landlord history with strong buyers, often by having them use a property management company, by showing significant reserves, or by having some, but not 2 years, landlord experience.”

Another route to investment properties that some are taking is renting out their current home and converting it to an investment property and then purchasing a new place as a primary residence.  This has some similar requirements and requires some expert juggling skills to have signed leases and deposits on the existing home before closing on the new one, but it can be done.

In order to use the rental income on the departing residence, Scott says they will need

  • Proof that the buyer has a previous 2 years of experience as a landlord.  This is documented by seeing rental income on 2 years of tax returns
  • Document 30% equity in the departure residence.  This is documented by an appraisal
  • A signed lease
  • Proof that a security deposit has been received and deposited
  • Two months PITI for both properties in reserves (can be retirement) after the transaction

“If we can do all of these things, then we can use 75% of the monthly rent to offset the monthly PITI (and condo fee, if applicable) on the departing residence,” says Scott.

If this sounds like too many balls to juggle at once in what is becoming a competitive sellers market, there is a third alternative for those who really want to build an investment portfolio, which doesn’t require as much juggling with tenants and timeframes.

Step one is to rent your existing home and then move into rental accomodations for a 6-12 month period while you look for a new primary residence to purchase.  After you have six months of rental history on your existing home, you will be freed from many of the guidelines above and can purchase another primary residence.  This option also gives you the flexibility to take your time and find what you want, while not worrying about finding tenants at the same time your trying to negotiate and coordinate a purchase.

If you’re considering taking the step to owning investment properties, talk with your agent and a lender before making any decisions.  Everyone’s circumstances are a bit unique and rules and lending guidelines change.

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