Your Mortgage: Invest in real estate

Mike Miles

By Mike Miles

While investing in real estate certainly isn’t a secret, it’s probably one of the least-sought after ways to build net worth. Some of that is due to its associated risk, but most potential investors also don’t know enough to actually do it. Today’s post may help with that.

Here’s a quick-hit list of some generalities you’re probably aware of:

  • Investment properties require larger down payments
  • Investment properties have higher interest rates
  • Investment properties have higher closing costs

Now here’s a quick-hit list of some generalities you’re probably not aware of:

  • Investment properties have easy debt-to-income underwriting
  • PMI on investment properties lasts for the life of the loan
  • Borrower’s can finance up to 10 properties total with conforming financing

But let’s do a deeper dive of the first list (things you’re aware of) a bit more.

  • Down payments – Investment properties, referred to NOO (non-owner occupied), require at least a 15 percent down payment, but most investors put 20 to 25 percent down. The minimum down payment for an owner-occupied home is 3-5 percent down.
  • Interest rates – Investment properties average a rate difference of about 1 percent or more depending upon things like down payment and credit scores. The variance between a 20 or 25 percent down payment would create a rate difference of at least .25 to .375 percent.
  • Closing costs – Investment properties have higher closing charges for two main reasons. First, appraisals are more expensive because there’s more work being done by the appraiser, usually averaging about $150 more. Second, a bank/lender’s margin may not be covered by the interest rate offered, so if that’s the case, a discount fee could come into play.

Next, let’s review the second list a bit more.

  • Debt-to-income underwriting – Guidelines allow for market rents to be used as income to cancel, offset, or minimize the monthly payment resulting from buying the NOO property. Surprisingly, most NOO’s are not rented at the time an investor buys it/them. Appraisers attach rent schedules giving an amount of what the area market rents allows, and this amount is used by underwriting. Pretty cool!
  • PMI is forever – I’d love to go into more explanation, but it’s pretty straightforward. If an investor doesn’t have 20 percent to put down at closing, the PMI won’t drop off as it would for a primary or secondary residence. It’s on there forever with NOO’s.
  • Financing up to 10 properties – this gives investors a lot of room to operate. Most investors don’t purchase 9 investment properties (10 including your primary). Once an investor exceeds 10, they’ll look at doing future NOO purchases using non-conforming products- something doable, just more expensive.

So, with this info you’re now armed to take over all of Kansas City! Kidding, but hopefully this was a quick review of some pretty beneficial information. Just remember us when you become a real-estate magnate!

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268