The rules for purchasing a rental property are highly specific, so anyone considering doing so should be aware of a few key stipulations.
First, realize that you will need a 20% minimum down payment. That said, the higher your down payment on an investment property is, the better—as is the case for other home purchases, as well.
The interest rate on an investment property will always be at least 0.5% to 0.75% higher than it would be for the purchase of a primary residence, but submitting a higher down payment can help reduce this cost.
Additionally, your debt-to-income ratio must be below 50%, and you will need to have a sum equivalent to at least six months’ worth of mortgage payments for your primary residence reserved in your bank. In the case of a $1,500 payment, this means you’ll need at least $9,000 in savings, a money market account, an investment account, or some other form of liquid account.
Retirement accounts can also count toward this, but only 60% of the funds within such accounts will be considered—given that retirement accounts tend to hold a penalty associated with liquidation.
And if you have more than one investment property, you’ll need to multiply this reserve amount by however many properties you accrue.
Finally, don’t forget that you’ll need to budget for closing costs—that is, unless you can negotiate for the seller to pay them.
The rental market is very strong right now, so I highly encourage anyone able to meet the stipulations we’ve discussed today to pursue building wealth through real estate.
If you have any other questions or would like more information, feel free to give me a call or send me an email. I look forward to hearing from you soon.