By Tammy Engel
Mortgage Advisor
Buying investment property
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Have you ever wanted to be a land baron? There are still some “deals” to be had in the housing market, but what does it take to buy rental property these days if you can’t pay cash?
The most challenging prohibitions are Fannie Mae’s and Freddie Mac’s limits on the number of financed properties per borrower. You cannot have an interest in more than four financed one-to-four unit properties when buying a rental home. For so many investors who bought several houses the last time around, this provision alone had locked them out of the market.
We’re seeing some relief on this front with financing becoming available again for those owning five to ten financed properties. This category of buyer needs a bigger down payment and more leftover reserve savings, but at least they are no longer locked out of financing.
You’ll need to fully document your income, so two years tax returns will be reviewed. A new guideline says you’ll also need to show at least two years experience in managing rental properties. Without having prior experience, the rent income from the new house will not be used to offset the new payment. This can cause debt ratios too high for loan qualification.
Today’s rental purchase loans are requiring at least 20% down, since the private mortgage insurance (PMI) companies are no longer insuring this occupancy type. Know too, that if you are considering buying a duplex, triplex, or quad, you will be required to make a larger down payment. Units of 5 or more are considered commercial property and are beyond the scope of this discussion.
And remember that investors not only need enough cash to close the transaction, but will also need to have leftover reserves equal to six months-worth of payments on the new house. If the seller will be paying some of your closing costs, the amount is limited to no more than 2% of the purchase price.
Because many people purchase real estate with an eye towards bettering their tax position, it is imperative to discuss your plans with your tax advisor. Only (s)he can tell you for sure if the joys of owning multiple properties will help you keep more of your hard-earned money out of Uncle Sam’s hands.
Tammy Engel is your local Mortgage Advisor and has been working for your best interest since 1990.
Contact her at 661/822-7325 for purchase, refinance, and reverse mortgage.
