Investment properties, also known as non-owner occupied properties can be very profitable for casual homeowners and real estate investors alike. While there is no guarantee that you’ll be successful, extensive research and the right timing could lead to a goldmine.
That said, it’s important to know the demographics for a particular neighborhood, and whether the market is set to improve or decline in the near and long term. It’s equally important to find a tenant to rent out your property to ensure you’ll achieve positive cash flow immediately. While it’s not imperative, positive cash flow will allow you to invest in other properties by minimizing losses and out-of-pocket expenses.
Discovering that “hot property” is often the impetus for real estate investment. But always take your time to investigate before diving in. And take special care when investing out of state, and especially out of the country. If you plan on buying an investment property in Mexico or Spain, do your research and make sure you’ve got a good understanding of the laws of the land. And ensure you’re working with a reputable broker or builder. Ask for references!
The next hurdle is obtaining financing on an investment property. Even if you’re familiar with how mortgage works, it’s important to understand the restrictions tied to investment properties as they often differ from owner-occupied properties and second homes.
If you plan on buying an investment property, be prepared to put some money down, usually 10% or more. 100% financing on investment properties is a thing of the past as banks and lenders took heavy losses from a large percentage of defaults and mortgage fraud. You may even need to put 15% or more down on the property depending on your credit profile, documentation type, and the value of the property.
Also note that many exotic mortgage programs such as option-arms limit financing on investment properties to 80% or less for the most part, so be prepared to come in with more cash if you’re looking for an ultra-low start rate or negative amortization.
Now comes the trickier stuff. Most lenders don’t like to lend to investors with over 10 investment properties. And many lenders have a limit to how much they will finance, so if you’ve got two loans with a certain bank or investor, they may not be able to provide financing on a third property if you’re over their aggregate financing limit.
If you plan on buying an investment property within a condo complex, note that investor concentration usually cannot exceed fifty percent. This means at least half of the units need to be owner-occupied. And if it’s a new development, usually at least fifty percent needs to be sold and closed before many lenders will provide financing. Most lenders also limit the total percentage of a complex owned to ten percent by a single entity, so if there are only 10 units, you can buy just one.
Of course these rules vary from bank to lender, and often developers will provide special financing on site to new investors. But these issues can and often do arise, preventing investors from obtaining favorable financing terms. So do your financing homework and obtain pre-quals before jumping into a contract. And be prepared to show up to the signing table with a down payment or you’ll likely be out of luck.