Investment Property Financing
An investment property is real estate that has been bought with the purpose of earning a return on the money put into the purchase. The intention might be to rent out the property, to hold onto it for some time and sell it for a profit in the future, or to renovate or rehabilitate a property and then resell it quickly for a profit. In most cases, investment property owners do not use the home as a primary residence.
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Differences Between a Second Home and an Investment Property
Buyers interested in an income-earning property often wonder whether they can qualify for a second home or vacation home mortgage, which may offer a lower interest rate, a lower down payment requirement, and other favorable terms when compared to an investment property loan. In general, if the home will be used as rental property, either for long-term or vacation rentals, an investment property loan will be required for financing. The number of additional properties owned and the distance from the owner’s primary residence may also impact which type of loan can be utilized. Typically the second home should be some distance away (for example, 50 miles) though exceptions are sometimes made for homes in popular vacation destinations.
Because investment properties represent a greater risk due to the higher frequency of default and foreclosure, these loans can be a little tougher to qualify for. Some of the more stringent requirements you’re likely to see include:
- Higher credit score required
- Larger down payment required
- Greater amount of reserves required (reserves are assets that can be used to cover the mortgage and other expenses in the event a property goes unrented)
Keep in mind that investment property mortgages are generally available for one to four unit homes. Properties with five or more units tend to require commercial financing.
Investment Property Tax Implications
Owning an investment property can have tax implications, and it’s important to get the guidance of an accountant or other tax professional to ensure you thoroughly understand how the purchase of the property and how you use it will affect your tax picture. For example, any income you earn renting out the property is taxable income and may need to be reported on your tax return. In addition you may be able to deduct some of your expenses such as mortgage interest and some expenses, such as repairs, that wouldn’t normally be deductible for a primary residence.
The ability to take these deductions can be impacted if you use the home for personal use for more than 15 days per year, or 10% of the total days the property is rented. Like many sections of the US tax code, the stipulations of an investment property are complicated, and the advice of a tax professional is critical.
Available Programs for Investment Property Financing
At eLEND we are proud to support real estate investment, from first time buyers to seasoned investors, and offer a selection of financing options. Available for both purchases and refinancing of one-to two-unit properties, choose from Conventional 30-year, 20-year, 25-year, 15-year, and 10-year fixed rate mortgages.