Buying Investment Property vs a Primary Residence

Buying an investment property can be a good financial move. There are some differences between buying a primary residence and investment property, though.

Obtaining a Mortgage

In nearly all cases, mortgage rates for investment properties are higher than when you buy a primary residence. The reason for this is that lenders tend to view an investment property as a riskier loan than a loan provided for an owner-occupied property. Lenders may also impose more stringent requirements on debt-to-income ratios and credit scoring.

Down Payment Requirements

Typically, if you are purchasing an investment property, the lender will require you to make a larger down payment. In many cases, you may be required to put down as much as 25 percent of the purchase price.

Greater Reserve Requirements

Your mortgage lender may have a reserve requirement when you purchase a primary residence. Reserves are generally to ensure that you have an emergency fund for things like unexpected repairs. When you seek financing for an investment property your mortgage lender may require you to have a larger reserve in case your rental income decreases unexpectedly.

Potential Tax Consequences

If you are considering an investment property, you should also understand there are certain tax benefits and drawbacks. You will, for example, have to claim the income generated from the property. You may also get some important tax breaks such as depreciation and other deductions, so it is a good idea to talk to a tax specialist about tax issues you may face.