How to buy an investment property – 5 tips for success
As you’re looking through your areas local homes for sale listings, you may be considering purchasing a second home as an investment property. While real estate is a great way to make passive income and save for retirement, there are a few factors that you need to know about when purchasing a second home.
Purchasing a second home is an investment –
Because you’re choosing to purchase a second home as an investment, getting a second mortgage or any personal lending will be much harder.
Most government-based mortgage lenders will require you live in the home for quite some time to qualify. That means you’d need to move into your second home and rent out your current mortgage. For some, this may not sound so bad – so, weigh your options.
Remember you won’t make money right away –
As with any investment deal, going into the project with clear expectations is key for success. Even though you want to use your newly purchased property as a source of income, you may not see any income while you’re setting up the property and listing it on rental sights like Airbnb. In fact, just because you list it on Airbnb, or similar, does not mean you will make a profit.
Instead, you’ll want to have extra cash saved up to cover the monthly expenses for the times you do not have tenants occupying the space. In addition, you’ll also be in charge of covering the monthly maintenance fees.
Go conventional –
Earlier, we mentioned the downside to purchasing a second home is that many government loans may not be an option for financing. But, not all loans are this strict. If you absolutely must get a second mortgage in your name to start this project, look into conventional mortgage loans.
Conventional loans do not have restrictions on the type of home you purchase, but they do require a larger down payment.
Sufficient Income –
Part of the mortgage application process is going to be to show you have sufficient income to cover the cost of your current and second mortgage without going over a debt-to-income ratio of 41%.
If you know you’re getting close to already having a high debt-to-income ratio, work on minimizing your debt for greater success with your application.
Credit Score Requirements –
Another requirement aside from showing you have sufficient income and a low debt-to-income ratio will be your credit score. Unfortunately, our credit scores are a huge determining factor in the loan approval process and you’ll need a score of 620 or higher to be considered.
If you need to increase your credit score, pay down as much credit card debt and personal loans as you can. Then wait 3 months for the credit bureaus to reflect the paid off balances and then apply with your mortgage lender. Your chances for success will be higher this way.