Buying an investment property is, in many ways, similar to purchasing your personal home. You start by defining your goals, then look at properties, make offers, take out a loan (in most cases), and finally close a deal.
Overall, the process is similar, but when you focus down to the details, there can be many important differences. Whether you are buying your first investment property or adding to an expansive portfolio, it helps to understand how and why purchasing an investment can be vastly different than buying your personal home.
Buying a Home vs Buying an Investment Property: What are the Key Differences?
Looking for the Right Property: The Research
The first step in finding either your primary residence or an investment property is to define your goals and research properties in the area where you want to buy.
For a primary residence, buyers need to think about the features and characteristics of their desired home. What layout do you want? Do you need a good school district? Do you need a yard? In many ways, this is a more connected, personal, and emotional issue. Once you define your personal priorities, you can start to search for homes and begin looking at properties.
The initial goal-definition and research for buying an investment property needs to be more focused on the bottom line and less personal. Essentially, you need to take a detached approach to your search and focus on profitability. One aspect to consider is distance. How far is too far? Most investors prefer to own properties within 50 miles of their home or work; in some cases they prefer much closer. Regardless, the property should be in an area that will attract renters.
It’s important during this initial phase to also consider the type of property you would like to buy, such as single-family homes, duplexes, or multi-unit properties.
Financing the Purchase
Most buyers will need to take out a loan in order to purchase a property. This goes for both primary residences and investments, although the process of loan application and approval can be slightly different.
Most people understand the process of applying for and taking out a home mortgage. The process is fairly simple (compared to loans for investment properties), and usually involves documents related to income, credit, debt loads, and work history, which are used to gauge your ability to repay the loan.
The loans for investment properties share many similarities, but overall they are treated with greater scrutiny and analysis. This is simply because investment loans have a higher level of risk; there is no (or, at least, little) emotional attachment to a duplex that is part of an investment portfolio, so investors are more likely to let loans on these properties go into default. While people will do virtually anything to protect our personal homes from foreclosure, the same can’t be said for investments. Lenders know this, so they work specific risk-reduction factors into the mortgage.
One of the biggest differences is the downpayment. With loans on a personal home, you can take out a mortgage with as little as 3.5% down and, with certain government-supported lending (VA and USDA loans), you can even purchase a home with 0% down. With an investment property, however, you may need to bring as much as 20% or more to make the purchase.
While obtaining a loan for an investment property, you may also discover that your credit needs to be higher. While you don’t necessarily need a stellar credit score, there are fewer low-credit options for investment properties.
Your income and debt-ratios will also be scrutinized, but this is actually one factor that can be slightly more flexible in certain situations. Loans for certain investment properties can actually use the future rental checks as an income basis for your application, which can eliminate the need to verify your income and compare it to your debts.
Overall, you should simply expect a more thorough and comprehensive process when getting a loan and buying and investment property.
Making an Offer and Closing the Deal
Eventually, you will have to make an offer and negotiate a deal for the purchase of your primary home and your investment property. Once again, you will see broad similarities but differences in the details.
With a primary residence, the overall goal is to provide a comfortable home that will keep your family happy for years. With this in mind, you may want to be flexible with negotiation terms and overall price. If you find a home that you truly love that sits in your desired area, you may want to accept a higher purchase price. If the home needs repairs, such as roofing or a new kitchen, you may accept the house as-is in order to finalize the deal.
Once again, when it comes to investment properties, you need to take an emotionless, numbers-based approach. The overall goal in this case is to enhance cashflow and invest in a property that will bring a strong financial future. With this in mind, you can’t afford to let the bidding go too high, and you don’t want to purchase a home that needs numerous renovations and repairs.
With an investment property, you need to be more willing to walk away from a purchase if the numbers are not right. It might be a gorgeous home with heaps of potential, but if there is a significant chance that the property will be a financial drain, it’s best to keep looking. Although this applies to a primary residence as well, it’s important to remember that there are always more homes on the market.
Providing the Right Support for Your Purchase
If you want to purchase a top-quality investment property, contact our staff today! From zero-down VA loans for a personal residence to jumbo loans for a multi-unit property, you’ll get everything you need from our dedicated and experienced team!