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Each month, we like to educate our community on different aspects of home buying. This month on our Community Partner Podcast Series, we sat down with the Branch Manager of our office in Centennial, Tim Clune, to discuss Investment Properties.
Investment properties are homes that you don’t live in, that you purchase solely for the purpose of driving income by renting it out. The actual process of purchasing an investment home can be a little different than a primary home and there are a few things to keep in mind before purchasing, and we will dive into some of these aspects in our podcast above, as well as the following post.
Down Payment
The down payment requirement on an investment property is significantly more than a regular purchase. For a single family home, including condos, townhomes etc, lenders require 15% down. For a duplex, triplex or fourplex, 25% down payment is required. Anything larger than a fourplex is considered commercial. The reason that down payments are significantly more on an investment property is simply due to the risk involved. If a homeowner gets into a pinch and has to choose between paying the mortgage on their own home or their investment property, their typically going to choose the roof over their heads. The lender wants to protect their investment because there is a significant amount of risk in an investment property.
Interest Rates
Similar to the down payment, interest rates are typically higher on investment homes than on primary residences and again, that is due to the risk involved. The amount of down payment, credit score, and property type are all factors that go into calculating the interest rate. Typically, you will see interest rates on an investment property be ¼ to ⅜ higher than primary residences, sometimes going up to ½ of a percent higher. It all depends on the different factors.
Projected Rent
The nice thing about investment properties is that the lenders can take the projected rent into account when calculating income. When you buy an investment home, the appraiser will give an estimate on the monthly rent, based on the going rent for that area and type of property. The lenders then use 75% of that to offset the mortgage cost. They only use 75% to account for vacancies or times when the home is not occupied. If you think you cannot afford an investment property, keep this in mind because it does help qualify people.
Tax Ramifications
One of the important things about purchasing an investment home is making sure you talk to your financial advisor or CPA before making any sort of decision. If you’re bringing in a positive income every month from your property, that, of course, is going to affect your taxes at the end of the year. Or sometimes you can show a loss because you get to use depreciation. Of course, it’s different for every person so it’s important to discuss these matters before you make a purchase.
Before you decide to purchase an investment property, it is important to research all the facts, find out all the information you can about the process, talk with your CPA or financial advisor, and talk to a loan officer to see what you qualify for. It is much different than just purchasing a primary home, and there are a lot of things to consider. Next week, we will discuss the role you assume once you purchase an investment property: landlord.
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