Investment properties can be a great way to expand your investment portfolio. Essentially you have someone else building equity for you by paying down your mortgage. You have the ability to write off many of the expenses related to your rental property as well including interest on mortgage payments, property taxes, repairs in that home, and property insurance.
If you are considering purchasing a rental home, it is important to keep a few things in mind. The first being that the minimum down payment on a rental home is 20% down. Because you are putting 20% down, there are many benefits that you do not see if you are putting less than 20% down. The first benefit is not being required to have mortgage default insurance and the premiums associated with that insurance. A second benefit would be having the ability to increase your amortization up to 30 years as opposed to the standard 25 years if you put less than 20% down. This is beneficial if cash flow is an issue. It is important to note that you are unlikely to get a lender’s best advertised rate when purchasing an investment property, but equally important to remember that as mentioned above you have the ability to write off the interest portion of your mortgage payment. If you are having a difficult time getting a 20% down payment, you can turn your existing home into a rental property and purchase a new home to live in with the minimum 5% down. If you are purchasing a home for your child or another immediate family member to live in and do not need the rental income in order to qualify, you can put less than 20% down as well.
Requirements to Obtain a Mortgage for an Investment Property
An appraisal will be required in order to obtain the true value of the home. If you are requiring rental income in order to qualify, you will need either current lease agreements if it is being rented out and/or a Market Rents Letter by an approved appraiser to see what the property should be rented for. All typical mortgage documents will be required as well including income and down payment verification documents as well as an Offer to Purchase.
Rental properties can be a very appealing option to diversify your financial portfolio. They can be good income generators or an option to set you up for retirement.