There are numerous benefits to investing in real estate: a steady cash flow, passive income, tax advantages, and more. However, investing in property will also cost you time and money, so it is important to have a plan in place before you start. But, how do you know when you are actually ready to start investing in real estate? We sat down with one of our trusted, local mortgage lenders for insight and tips for anyone thinking about investing in real estate.
1. How much money or what percentage of the purchase price do you need in savings to purchase an investment property?
The minimum down payment for an investment property is 15%. However, with a 15% down payment, you will have a higher interest rate and you will have to pay for mortgage insurance. That is why this lender recommends that a purchaser have a 25% down payment for purchasing real estate as an investment.
2. What credit score do you need to purchase an investment property?
The minimum credit score for qualifying to purchase an investment property is 660. It usually does not make sense financially to try to purchase an investment property with lower than a 660 credit score. It is recommended that a credit score of 740+ be your goal for any conventional loan program, whether it be for an investment property or primary residence, because interest rates are higher with lower credit.
3. What percentage interest rate can you expect to pay for an investment property?
On any normal day, the interest rate for a loan on an investment property will be about 3/8 to a 1/2 of a percentage point higher than the interest rate for a loan on a primary residence. For example, if a person with a 740 credit score is purchasing a primary residence on a normal day, the lowest interest rate they can get is around 2.5%. If that same person was trying to purchase an investment property on the same day, their interest rate will likely be around 2.875%.
4. What other qualifiers must a loan candidate meet to be eligible to purchase an investment property?
The Purchaser will need to have some reserves and a low debt-to-income ratio. You will want to have at least 2 months of reserves for the investment property you are purchasing. Our local mortgage lender encourages investors to have 6 months of reserves for each investment property they have. You will also need to have a debt-to-income ratio of 45% or less.
Any other tips?
One of the most important things to have in order to be ready to invest in real estate is a plan. If you really want to get into investment properties, you need to have a game plan on what type (condo, home, etc), and to do research on the area that you are looking to invest in. Get pre-qualified before writing an offer.
Last but certainly not least, potential investors should find a good, trustworthy real estate agent that knows exactly what you are looking for and stick with them! That’s where we come in – give us a call today if you think you might be ready to invest in real estate and build passive income! We would love to help you.