Is an Investment Property Right For You?

For the right kind of buyer, an investment property can pose an excellent opportunity to earn rental income, especially since property values have been rising steadily since 2007 and are expected to continue in the short-term. However, the rental game isn’t right for everyone. You’ll want to take into account the following considerations before taking the plunge:

You’ll Need A Credit Score of 740 Or Higher

Mortgage professionals recommend an “excellent” credit score of at least 740 before you consider purchasing an investment property. Otherwise, you’ll be require to pay points or accept a higher interest rate. Either option means more expense and an increased likelihood of getting underwater on the property in the future, especially if the home should depreciate in value.

You’ll Need a 20 Percent Down Payment

One thing that differentiates a rental property from a primary residence purchase is that mortgage insurance doesn’t cover an investment property. As such, you’ll be required to put at least 20 percent down to secure traditional financing for your rental property loan. Many lenders will offer their very best interest rates to buyers who come up with a full 25 percent down or more.

You’ll Need A Savings Account That Is Six Months Strong

In addition to a strong credit score and a robust down payment, lenders also require proof that your finances can safely absorb six months with a vacant rental, if necessary. That means, in addition to a 20 percent down payment, you’ll have to prove you have the requisite cash reserves to pay your mortgage for six months even with no rental income.

Image via Flickr/jasonkula