Have you considered buying a property to rent it out, or moving from your current residence but keeping it as a rental property? Owning an investment property is one of the best things you can do to gain long-term financial security. The rate of return on an investment property will almost always be higher than any bank account or investment portfolio. Purchasing this type of property has a few requirements that are different from a primary residence purchase. Below are the main points to know:

  • Consider what your goals are for the property. If you are looking for a monthly cash flow right away, you will need to select a property with a low sales price and higher rental amount to ensure a more immediate return. If you are more focused on a large long-term return and can afford to take a loss at first, the higher priced homes may be a better investment.
  • If you are purchasing a condo, the building must be approved by Fannie Mae. Your lender should be able to tell you if the condo has been approved.
  • Loans for condo investments also require that at least 51% of the units are occupied by the primary owners, not rented. Your real estate agent should be able to give you this information.
  • A conventional loan is the only program available for investment properties.
  • 20% is the minimum down payment required, but your rate will improve significantly if you put down 25% or more.
  • If the loan is over $417,000, a 35% minimum down payment is required.
  • Closing costs cannot exceed 2% of the loan amount.
  • The appraisal fee will be slightly higher on an investment property.
  • The homeowners insurance will be slightly higher ($100-$200/year) as it must include landlord insurance. 
  • If you are purchasing more than one investment property:
    • As of July 1, 2014, anyone owning more than 2 investment properties must abide by the Virginia Landlord Tenant Act
    • The minimum downpayment increases after the first 3 properties
    • Fannie Mae will only cover up to 10 properties
    • You can buy more than one at the same time, but each would be a separate loan so you would need to qualify for each separately 
  • Consider transferring ownership into an LLC after purchase. An LLC will protect you against legal claims from tenants. Note: You must purchase the property as an individual and then transfer it into an LLC afterwards. An LLC does not protect against mortgage default, as the loan remain in your name.
  • As the owner of an investment property, you also get to write off repairs and HOA dues from your taxes.
  • Once you have purchased your property and are ready to rent it out, you can contact a real estate agent to take care of the marketing, applicant screening and lease preparation. They can also put you in touch with a property management company if you aren’t keen on handling the tenant relations on your own.
  • Other options to save on operating expenses are to advertise the rental on websites such as Craigslist, and to put a home warranty on the property to easily cover repairs rather than employing a property manager.

Happy hunting!

Posted on July 9, 2014 at 9:26 am by Palmer Harned

This content is not the product of the National Association of REALTORS®, and may not reflect NAR's viewpoint or position on these topics and NAR does not verify the accuracy of the content.