With the excess supply of properties on the market and prices in decline, maybe you’re one of the lucky few who can turn lemons into lemonade by taking advantage of the housing market downturn. For example, maybe you’ve got a walletful of spare change and you’re thinking about buying an investment property to rent out.
Before you do, there are a few major things you should consider before taking the leap. First off, you’ll need to figure out how you’re going to finance the property. Rhonda Porter put together a great piece on Financing an Investment Property, where she gives some good examples of the applicable loan rates that might apply to your investment property. For example, since investment properties are Non-Owner Occupied (NOO) dwellings, the interest rates will likely be higher than for Owner Occupied dwellings reflecting the higher risk of the investment property to the bank, even if the downpayment is higher than the standard 20%. Rhonda gives an example of a 30 year fixed mortgage on a $450,000 SFH with a minimum credit score of 720:
Owner Occupied with minimum 20% down: 5.75% priced with 1% origination/discount point (APR 5.904%)
Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)
NOO with 25% down: 6.250% with 1% point (APR 6.413%)
NOO with 30% down: 6.125% with 1% point (APR 6.289%)
With financing and potential rental income in mind, you should also consider the planned time horizon of your investment. It generally takes time (lots) for real estate to appreciate beyond the transaction costs of buying and selling the property and you should also factor in taxes, insurance, and costs for repairs, maintenance, and even improvements during your holding period. For example, one new roof can easily suck up a year’s worth of appreciation, even in a good market. However, repairs are tax deductible in the year they are made and improvements are added to your tax basis, though you won’t realize the gains from these until you sell the property.