Investment Properties Opportunities
[March 2020 | By John Leu, Loan Officer]
In the current investment property environment, short-term rentals (STRs) are becoming more popular. The conversion of a second home or other structures on your property to an STR is at an all-time high. The opportunity to make additional income has become more apparent with the rise of homes used for vacation. However, the initial investment can be higher than the long-term return.
Let’s first look at the difference between a long-term rental (LTR) versus the more recent and popular short-term rental (STR).
• LTRs are typically a 1- to 4-unit property that are rented for periods of 6 months or longer. These properties are usually managed by property managers or the homeowners themselves.
• STRs are typically single-unit homes, portions of a home, or a secondary structure attached to a property. The rental agreements are for less than 30 days but are commonly just a few days.
When looking to purchase any property, the buyer’s occupancy is a major contributing factor to the costs of a given loan. Is the buyer going to occupy the home full time, part time, or not at all? Under a second home purchase, the owner has declared they intend to live in the home a portion of the year. With an investment property, the purchaser has no intent to occupy it.
Location of the proposed property in relationship to your current primary residence combined with the intended use are the key factors to establishing the proper loan. Most loans will not allow a second home purchase within the same area or community as the existing primary residence.
Each type of purchase can have its advantages and disadvantages. The down-payment requirements can vary from 10 percent to 25 percent down, and interest rates on investment properties tend to run higher than second homes. Proposed rental income on a second home cannot be used to calculate repayment income; on an investment property purchase, you can count the proposed or existing rent towards qualifying repayment income.
Borrowers must have liquid financial reserves of varying amounts based on not only the property they intend to purchase, but for every property in their portfolio. Restrictions on minimum credit scores are required in most scenarios. These are just a few of the guidelines that lenders review through the lending process. There are many more that govern the qualifications of these purchases.
The requirements mentioned are just a few of the details a buyer should consider in their “risk-versus-reward” evaluation. Weighing the pros and cons of all aspects of the transaction is imperative to understand not only the long-term benefits but the true overall cost of any purchase.
My best advice is to talk to your real estate and lending professional to lay out all of your potential transaction.