So it’s time to use some of that cash you have sitting in the back. Are you buying a new home for yourself? Or are you putting that off and thinking of investing? Either way, you’ll want to know how the process of buying an investment property and buying a home is different.
The differences between buying an investment property and buying a home revolve around financing, desired features, and cash flow. There are also some similarities in these areas. But before we discuss these aspects, let’s clearly distinguish between a home (as a primary residence) and an investment property.
What is a primary residence?
A primary residence is simply the home you live in. If you live in multiple homes, then it is the home you live in for most of the year. If a primary residence is newly purchased, the buyer must live in it 60 days following closing. You also need to prove if a home is your primary residence. Tax returns and voter registrations can be used as proof of residence.
There are beneficial tax deductions with having a primary residence. You can deduct mortgage interest, interest on equity loans or line of credit up to $100,000, and property taxes.
What is an investment property?
Broadly speaking, an investment property is a property you do not live in, and is used to generate profit through renting or appreciation. Buying an investment property makes you eligible for tax deductions, especially if the property is used as a rental. By renting, you can claim expenses for repairs, management, cleaning, supplies, and insurance premiums.
Related: Buying a Rental Property
What’s the difference in buying in these properties?
Researching the property
Property Type
- Investment property: What kind of property do you want to invest in? A single-family home? A condo? A townhouse? Buy a property that is suitable for renting, appealing to tenants, and appropriate for the market.
- Home: What kind of home do you want to buy? A bungalow? A cape cod? A ranch? A colonial? Buy a home that you would like to live in.
Looking for a Property
- Investment property: There are many websites that you can use to search for rentals. Mashvisor allows you to search for profitable properties and calculate their expenses using an investment property calculator. Other sites include Realtor and Zillow.
- Home: Realtor and Zillow also help you discover homes. People also learn of these properties through word of mouth, advertisements, and newspapers.
Location and Neighborhood
- Investment property: The location will either attract or repel tenants, which affects your vacancies and occupancy rate, and in turn, affects your income. If you’re renting traditionally, have a property in an area with a good job market, nearby school district, and close to lots of amenities and facilities. If you’re renting as a vacation rental or through Airbnb, have the property near tourist attractions.
- Home: Where you want your house, in the city or suburbs, is up to you. A good rule of thumb is to live close to, or at least a reasonable distance from, your workplace. Safety is of course a factor that is taken into consideration with any kind of property.
The Property Itself
Whether you are buying an investment property or a home there are some general features you want your property to have. Proper wiring, parking space, room sizes, and interior layout are among the many things you should check in a property. A floor plan is also a useful feature to have.
When buying an investment property, you want to make sure the features are attractive to tenants. If you’re buying a home for yourself, you should buy according to what you like. Want to know more home features to consider? Click here.
Related: Top 5 Things to Look for in a Real Estate Investment
Financing the property
Good Credit
Buying an investment property requires a higher credit score than buying a primary residence. Having good credit will make you more eligible for loans and will lower your monthly payments. While the market will vary from place to place, a good starting base is a credit between 640 to 660. A credit of 750 or higher will definitely help you get the best rates. If your credit is not suitable, you may want to focus on building up great credit instead of buying the property.
Loans and Mortgage
To finance the property, head to your bank to get pre-approved for a loan or a mortgage. This will determine how much you can borrow and how much you can afford.
Loans for primary residences tend to have lower interest rates than those for rentals. They also have lower mortgage rates. Rentals require larger down payments.
Related: Financing a Rental Property: What’s the Best Way?
Making an Offer and Closing
Once you are sure you want to purchase a property, make an offer to the seller. Remember your goals, positive cash flow if you’re buying an investment property or a nice house to live in, while negotiating. Do not be too distressed if negotiations break down, there are other properties out there that you can purchase.
If things go through and the deal has been made, it’s time to inspect before the closing date. If there are issues with the property, you can re-negotiate with the bank or have the seller solve the issues. Closing also brings in costs such as attorney fees, inspections fees, and appraisal fees.
Now Go Get Em
Buying an investment property or a home is an important real estate purchase. Be informed about the property and the contract details. Always be sure to contact your bank, agent, and lawyer to better understand the process of buying a property.
To find profitable investment properties based on your goals quickly and efficiently, visit Mashvisor.