What About Investment Properties
In September – October 2015, we asked users of several forums on TexAgs.com to submit their mortgage-related questions. The questions were great, so we thought we’d share a summarized list of the questions (and their answers) on our website. We’ve grouped them into three major categories:
Have questions that aren’t answered here? Send them to us at firstname.lastname@example.org and we’ll get you an answer asap!
Investment Property Q&A
Should I consider investing in a vacation condo if there’s a place I like to visit?
In general, if you are really interested in real estate investment and that is driving your considerations, a house with a long-term lease is typically a better choice than a vacation condo. That said, condos are great for your own use – minimal upkeep, easy to rent to vacationers through short-term rental management systems like VRBO, and you can block out the time that you intend to stay there yourself.
Also, if you’re planning to use it for your own activities, you don’t need to get an investor loan. Purchasing as a second home, you can get rates nearly identical to primary residence rates. Investment property loans typically require a larger down-payment and carry higher rates.
In short, owning a condo as second home that you rent when you are away is a great way to enjoy a vacation destination while offsetting the cost with rentals. However, it is not our first choice as an investment property.
How much do I have to put down on investment property?
In general, lenders ask that you put down a minimum of 20%, and rates get better as you put down 25 or 30%. However, we now offer a product where you put down 15% of your own money, and we give you a 2nd lien for 10% (Hurst Lending loans our own funds for the 2nd lien – this is not available from other lenders that we are aware of). That way, you get the lowest available rate for the bulk of your loan, bundled with a low 15% down. With either option there is no mortgage insurance.
What is the minimum down payment for a second home?
You’ll need to put 10% down for a second home. For the property to qualify as a second home, you will need to spend at least 15 days a year at the property, and it will have to make sense as a second home. In other words, a second home cannot be 20 minutes from your primary house in a non-resort area. It would need to be in a resort-type area or in College Station for a gameday type house if you have season tickets, etc.
Is it better to buy a rental property with cash, or get a loan and pay it off over time with rental income?
Everyone’s situation is different – opportunity costs, risk acceptance, and debt aversion all play a part in a decision like this.
In short, there’s not an absolute “right” choice. It’s up to you and your personal preferences – what makes you feel comfortable with your financial situation. Some of our clients want to lock in the low interest rate, have a leveraged return and have renters buy the property for them over time. Other people are debt averse and find the idea of having it paid for and bringing in extra money very comfortable.
For those who are comfortable having debt, it’s unquestionably a fantastic time to take advantage of historically low interest rates to build a portfolio…. That said, if you are debt averse and are able to pay cash, that’s certainly a valid approach as well.
If I recently bought a house and need to move, does it make sense to keep the house and rent it out, or sell it for a loss?
It’s hard to manage property from a distance unless you have someone that you trust locally to keep an eye on things. If not, you can consider a property management company, although that will eat into your earnings. If you can rent it for enough to cover your cost and write off your interest and expenses, it probably does make sense to rent the house and sell later when the value increases.