First Investment Property - Financing Questions
Hello,
I'm looking to purchase my first investment property and have a couple of questions about how to best finance something like this. Let me give you some background information first:
I recently purchased my first (owner-occupied) home in Surprise, AZ. As of today, I have approximately $75,000 in equity as a lender would see it. $50,000 of this is because I have a personal loan from my uncle that was used as a 20% down payment. It has not yet been recorded as a second mortgage, but it will at some point in the future. I'm thinking I can use this for leverage before we record it as a second if needed.
Anyways, my parents recently sold their home and are looking to move here as well. They want to rent for one year before purchasing another home so I figured they might as well rent from me. They are willing to put up a maximum of $25,000 to be used however we can to help me get into this first investment property. We will work out how to give them a fair return for their investment on our own. They can also sign a one year lease agreement which we can show to a lender as verification of income from the property.
The average property profile looks like this: 3-4 years old, $125k - $150k, $20k in equity, one story, 1700 sq ft, 3 bd 2 ba, good condition (no fix-up work needed). We'd like to get in using the least amount of our own cash as possible.
Having said all of this, here are my questions:
1) How much of a down payment do most investment properties require? A mortgage broker told me 20% is typical but I'm skeptical. I don't want to tie up that much cash. Is 10% a workable number for a down payment?
2) How much higher is the interest rate on an investment property (just looking for a ballpark, I know it varies).
3) If you were in this situation, what kind of creative financing methods might you employ, given that you are trying to get into this investment using the least amount of your own cash as possible?
4) Also, if you have any suggetions or comments about this investment that are separate from the questions I have, I'm all ears. Looking for some experienced investors to just point me in the right direction on this one.
Thanks in advance!
Scott
[ Edited by Scott27 on Date 07/06/2004 ][ Edited by Scott27 on Date 07/06/2004 ]
1- 0-20%. If your credit is good and you have the equity you say you have, should be able to qualify for a standard 80-90% loan if the debt coverage is there.
2- On the 15-30yr fixed rate mortgages, ~.5-.75%.
3- I would look for a 90% loan (20 or 30yr fixed, try to cover 10% with HELOC (If you can't pay off the 10% within a year I think you are probably over your head on this)
4- This idea you have is fairly aggressive, looking at a $125-150k property when your net worth is $25k. I would not do anything less than 12% gross reguardless, so you need to be confident that you can rent the place for $1,250-$1,500 per month. If you can cover the payment with current income it may be OK, otherwise I would start with a cheaper property. Also, I don't believe in financing investment property for more than 15yrs. In this case I recommend a 30yr note to lower your risk when vacant. I have 2 30yr notes myself to lower my interest rate risk (since I have a lot of adj debt).