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Buying Investment Properties

It is possible to purchase investment or rental property with 100% mortgage financing. There are mortgage lenders that offer this loan type, and with different loan terms. This allows a real estate investor to maximize their leverage on a property. Here are some tips to help you if you are looking to buy investment property with 100% financing.

Basics

A 100% non owner occupied purchase usually involves:

Credit, Income documentation, Loan sizes, Property types

Credit

Mortgage lenders typically require a borrower who wants to buy investment property to have good credit.  A credit score over 680 or 720 is generally more desireable, although different lenders offer different options. The borrower usually needs to have no mortgage lates on any of the properties they currently own. Lenders do not want to make laons to borrowers who cannot properly manage their rental properties.

Income Documentation

There are three basic mortgage documentation types:

Full documentation, Partial documentation, and Stated documentation

Full documentation

Involves disclosing to the mortgage lender a wide range of personal items, including:

Income tax records

Recent pay stubs

Bank accounts

Retirement funds

Employment documentation

Partial documentation

is documenting some items and not others. This is usually documenting assets but not income. For 100% non owner occupied purchase loans a borrower often needs to show substantial assets. Many times this may be 6 months of "reserves", which is 6 months of assets to cover the property's full expenses. These assets are usually in the form of cash in the bank, but may be able to use a discounted amount on retirement assets.

Loan Sizes

A 100% non-owner purchase loan usually involves loan limits. These loan sizes are often up to $500,000. This is something that is determined by individual lenders, and can change over time or depending on the loan type the borrower is seeking.

A mortgage lender may also have restrictions on the number of different properties an investor may own. Some lenders cap this at 4 properties, while others have no caps at all on the number of rental properties a borrower can have.

Property Types

Lenders may also restrict borrowing to certain property types. This may include single family residences, condominiums, townhouses, and 1-4 unit properties.

Lenders may be less likely to offer 100% non owner occupied financing for other properties such as rural properties, modular homes, or manufactured homes.

There may also be restrictions on certain states or other areas, depending on the lender's requirements. Some lenders will not lend at all in some cities.

Lots of people are purchasing rental property.  This is estimated to be a record year for the purchase of rental properties and second homes.  With rates this low, and the economy struggling, more people are looking for places to rent, and since rates are low, it's easy to make quite a bit of cash flow profit and appreciation from rental properties.

Sometimes it may make sense for the property to be a 2nd home or vacation home instead of a rental property - we can explain when.  2nd homes have a lower rate than rental properties.

What kind of return should I look for?

This depends.  Some people want to be cash flow positive year one, some just want positive net worth year one.  Some look to fix up and improve properties and sell for a profit.  The longer you hold the property, the higher the return (the miracle of compound interest).  In fact, if you hold the property for 30 years, it's paid for, you own the asset and you have income from rental!  Nothing like having someone else pay your mortgage.

Can I Deduct the Interest on an Investment Property?

You can deduct the interest against the income you receive.  Very often you can be cash flow positive but show a loss on your taxes, further reducing your income and tax burden.  Consult your tax advisor for details.

What are the Consequences if I Rent a Second Home?

The rules depend on whether you use the second home as a residence. A home is used as a residence if you (or a family member) use the home for personal purposes for more than the larger of 14 days, or 10 percent of the number of days that you rent the home at fair rental value.

If you use the home as a residence and rent it for less than 15 days during the year, you do not have to report the rental income. You may not deduct any expenses attributable to the rental, but you may deduct interest and taxes as discussed above if you itemize your deductions.

If you use the home as a residence and rent it for 15 days or more, you must report the rental income and you may deduct rental expenses up to the amount of the income. Special ordering rules apply when computing your deductions for your expenses. Interest and taxes not deductible from your rental income because of these rules can be deducted if you itemize deductions. Other rental expenses not deductible from your rental income can be carried over and deducted from your rental income in later years.

If you don't use the home as a residence, the above rules do not apply. You report your income and expenses in the same manner as for other rental property. You may not deduct expenses other than interest, taxes, and casualty losses attributable to your personal use of the home.