Buying Investment Property Versus a Primary Residence

by Alan Blackie 01/03/2021

 Photo by Alexander Zvir from Pexels

Those who currently own a home may consider investing in a second home for income purposes. However, it is important to understand you may have hurdles to overcome when searching for a mortgage or obtaining homeowners insurance. Here are some of the most significant differences between buying an investment property and a primary residence.

Obtaining a Mortgage

In nearly all cases, mortgage rates for investment properties are higher than when you buy a primary residence. The reason for this is that lenders tend to view an investment property as a riskier loan than a loan provided for an owner-occupied property. Lenders may also impose more stringent requirements on debt-to-income ratios and credit scoring.

The news is not all bad because while a lender may have stricter debt-to-income requirements, a portion of your anticipated rental income may help offset the change.  Not all lenders will include potential rental income, but it is worth asking about. If your mortgage lender is willing to use the rental you expect to collect as part of your income it is likely they will use a percentage of the rent, less potential repair costs, and vacancy costs.

Down Payment Requirements

Typically, if you are purchasing an investment property, the lender will require you to make a larger down payment. In many cases, you may be required to put down as much as 25 percent of the purchase price. The good news is that unlike with the purchase of a primary residence, you may be able to borrow the down payment. However, this will have an impact on your debt to income ratio because you will be paying another loan.

Greater Reserve Requirements

Your mortgage lender may have a reserve requirement when you purchase a primary residence. Reserves are generally to ensure you have an emergency fund for things like unexpected repairs. When you seek financing for an investment property your mortgage lender may require you to have a larger reserve in case your rental income decreases unexpectedly.

Potential Tax Consequences

If you are considering an investment property, you should also understand there are certain tax benefits and drawbacks. Unlike a primary residence, you will have to claim the income generated from the property. You may also get some important tax breaks so it is a good idea to talk to a tax specialist about tax issues you may face.

If you are considering investment property as a means of generating additional income and building future equity, make sure you understand the hurdles you may face. Your real estate agent can help you learn the rental history of the property, neighborhood details, and other information you should know before making this important decision.

About the Author
Author

Alan Blackie

Personal My personal credo is simple: Treat others as you would wish to be treated. I also carry this into my business life. As a result you can expect me to work with you to maximize the value of the time we spend together and the price finally agreed in our transaction. I will talk with you not to you. I will answer your call or communication in a prompt and courteous fashion. I will exercise unerring commitment to service while, showing empathy with your needs and goals. A Norwalk resident since 2002. Education Educated in England to HNC in Electro-Mechanical Engineering Therfield County Secondary School: Surrey to GCSE, A Level Carshalton College Surrey: Electro-Mechanical Engineering to HNC. Dale Carnegie London UK: Effective Communications & Human Relations/Skills for Success. Professional Association Member of New Canaan Multiple Listing Service. Member of Greater Fairfield County Multiple Listing Service. Mid-Fairfield County Board of Realtors - Member. Connecticut Association of Realtors - Member. National Association of Realtors - Member. Community Involvement Person to Person Open Door Shelter Norwalk Land Trust - If you are actively looking to buy homes or sell property in the Coastal Fairfield County area, feel free to call me at (203) 219-9510, 8.00am through 8.00pm EST alternatively email or text anytime. Residential Sales, Residential Listings, Exceptional Properties, First Time Home Buyers, Corporate Relocations, New Construction, Investors. Areas Covered: Coastal Fairfield County including but not limited to - Norwalk, Rowayton, Stamford, Trumbull, Fairfield, Westport, Wilton, Weston Thanks for stopping by. Feel free to reach out with any real estate related questions or requirements that you may have. Licensed in CT #RES 0765024