The Basics of Financing an Investment Property

If there’s one bright spot in the whole real estate market these days, it is the number of properties that are available at very low prices.

Many of these properties are priced such that they are suitable as investment properties, to be either bought and resold relatively quickly or bought and kept as rental properties to generate income over an extended period of time.

Following are the basics of what you need to know from a financing perspective if you’re thinking about purchasing an investment property.

Plan on putting down a minimum of 20%, and probably closer to 25%, when you purchase an investment property, as opposed to putting down between 3.5% and 10% on a property in which you intend to live.

Lenders are risk averse to lending money on properties where the monthly income may come, in part or in full, from a third party, such as a tenant. They offset this risk by raising the stakes for a potential borrower by causing the borrower to have enough financial interest in a property so as to make the person want to hang on to it come what may.

As far as asset reserves are concerned, plan on having six months of the entire payment, including taxes and property insurance, in some liquid form like certificates of deposit or checking or savings accounts. Lenders know that rental properties may sit vacant and flipped properties take time to sell.

Call your mortgage professional today to get more details on what you need to do to start financing an investment property.