INVESTMENT PROPERTIES AND SECOND HOME LOANS

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What is an Investment Property Loan?

A Plus Mortgage Rates offers loans for investment properties and second homes.  We do single family homes, condominiums, and multi-family dwelling.

An investment property is a non-owner-occupied home. Mortgage insurance is not available on this type of loan, therefore, a minimum of 20% down payment is required.

Traditional lenders typically charge a higher interest rate for this type of loan, the average is about a quarter to half a point higher versus an owner-occupied home. Owner occupied being the primary residence of the borrower and the investment property being a rental for Air B and B for example.

What is an investment property?

When real estate is purchased to generate income through rental income or appreciation, then it is considered an investment property. Investor properties can be purchased by individuals or investor groups sometimes in the form of REIT which are known as real estate investment trusts.

Investment Property Loans
Investment Property Loans

Can you live in an investment home?

Yes, anyone can live in their investment home but most people rent them out as someone else’s primary residence or a rental for vacations.

 

What are examples of investment properties?

Investment properties examples are the following:

  1. Any land held for a long-term capital appreciation
  2. Any land held for an undetermined use and amount of time
  3. Any building leased out under an operating lease
  4. Any vacant building held to be leased out at some point in the future under an operating lease

What is the 2% rule?

The 2% rule is a guideline used by investors to gauge a good return on investment when purchasing a property. If a property can produce monthly rent that is equal to 2% of the purchase price, then its considered a good investment.

 

For an investment property, what is the 1% rule?

The rule of 1% is an investing rule in real estate which measures the price of the investment property against the gross income it will generate. For the investment criteria to pass, the monthly rent must be equal to or not less than 1% of the property purchase price.

 

What are the benefits of having an investment property?

The benefit of having an investment property is you can own the property, rent it out to collect payments that cover your mortgage payment. The equity being built in the house is yours while your renter pays off your loan due to the bank. This is a great way to build equity when the property increases in value. Investing in properties can be less risky then purchasing stocks in the stock market.

 

In real estate, what is the 50% rule?

For real estate investors, the 50% rule says that a property’s operating expenses should be approximately 50% of its gross income. This figure should not include the mortgage payment but should include property taxes, repairs, insurance, any owner paid utilities and vacancy losses.

 

In real estate, what is the 70% rule?

Real estate investors always consider this rule in flipping houses. The rule states you should not pay for an investment property any more than 70% of the After Repair Value (ARV) minus cost of any repairs.

 

Investment properties, what are the tax benefits?

The main tax advantages of investment property are depreciation, capital gains exemptions, the claiming of interest on your mortgage, and most interestingly is no tax is paid on withdrawal from equity loan.

 

Do I pay taxes on investment property?

Yes, your subject to property taxes applicable to the state the investment is located. When you sell an investment property, an investor must pay capital gains tax on the transaction. This tax is calculated based on the purchase price subtracted from the sale price. The net proceeds from the sale are taxable.

 

What are the 3 golden rules of buying properties?

  1. Buy in booming markets
  2. Only purchase properties that are cashflow positive, the higher the down payment more likely you can cashflow immediately
  3. Never sell, buy and hold long term

 

How is tax on rental income calculated?

Rental income is taxed on your net rental income. The difference between your rental property mortgage payment and the amount you charge for rent. For example, if your monthly payment for the mortgage on your rental is $3,200 and you’re renting the property for $4,000 per month, then the net profit is $800. The net profit is subject to rental income tax. Please consult with your local tax advisor to understand how much tax is paid on that net profit.

 

Can you sell an investment or rental property and not pay any capital gains?

To avoid paying capital gains tax, you can 1031 exchange your property. Once you sell the property the proceeds of the sale go to an escrow account. Depending on your state, this exchange period ranges from 90 to 180 days. During the time your funds are held in escrow you can shop for another property. In some cases, investors already have the next property they want to acquire lined up ready to make an offer contingent on the sale of their existing property. Typically, you need to purchase a property for a higher value than the property you just sold to not pay any capital gains but consult with a tax advisor, a certified public accountant or a trusted financial advisor.

 

Is a second home considered an investment property?

A second home is considered a second home if you use the home for 14 days each year or 10% of the days you rent it out whichever is greater. If this minimum is not met, then it will be considered an investment property.

 

Can I get cash out on my second home?

Yes, we can give you cash out on a 2nd home and investment property up to $500,000. The FICO score must be at least 680 to qualify. To be approved for cash out on an investment property, you will need to provide copy of rental agreement, copy of the mortgage coupon and homeowners’ insurance. We typically fund in 21 days assuming we get the appraisal back in that time frame. We’ve funded deals in as little as 14 days with a rush put on the appraisal.

 

Questions?

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