Financing an Investment Property

EDITORS NOTE:  Rates on this post are from 2008!  Mortgage rates for investment properties are much lower now! Contact your local licensed mortgage originator for a current rate quote.

Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in.  For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender.   Here are some quick tips to help get you started if you’re considering buying an investment property.

Plan on using at least 20% for your down payment plus closing costs.   With a 25 or 30% down payment, you will receive a slightly better interest rate.   Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:

Owner Occupied with minimum 20% down:  5.75% priced with 1% origination/discount point (APR 5.904%)

Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)

NOO with 25% down: 6.250% with 1% point (APR 6.413%)

NOO with 30% down: 6.125% with 1% point (APR 6.289%)

Of course, you can always pay more in points to have a lower rate.   This is just to provide you with an apples to apples comparison.

There are two camps for qualifying for an investment property:  those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history.  If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase.  Lenders allow 75%  of the rent to be used for qualifying purposes.   Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s.   If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal.  Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing.   Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers.

Odds and Ends

  • FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home.  The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction.   You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
  • Second homes are sometimes treated as investment properties.  This is really up to the underwriter.  Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
  • Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).

As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).


Have you heard about Zilpy? New site for tracking rents in cities across USA…

A title rep sent me an email today that gave me a head’s up on a new site I’d not seen before called It looks a heck of a lot like Zillow but with data on rents instead of home values. I’ve been playing around with it a bit and while I can’t figure out exactly yet how they’re getting the data, I’m intrigued. Most likely I’ll make mention of it to some of our investors to get their feedback on it as well and see if they think it’s a worthwhile site.

Check out the function of “heat maps” for rent levels in Washington. More states and cities are covered so it’s not just a Seattle gig. I believe it’s come to life from Silicon Valley.

A class act… Screen for Success via Rental Housing Association

I’ve been a big fan of Tamara Simon and her landlord focused classes for some time. She’s been kind enough over the years to provide slimmed down versions of them for my clients and other public classes I’ve sponsored over the past 5 years. So, today I’m giving her a plug for an upcoming class she is doing for RHA where she has been involved in the education committee for years. She’s a top educator in this field and a darn good business woman and property manager.

Anecdotally, in my own RE business I’ve seen an uptick in interest in rental housing purchases (MFH) as prices have softened in that market area (read dumb money leaving the market! :)) so if you’re one of the people looking to own rental property, and especially if you plan on self-managing, this is a class to attend.

Presented by Rental Housing Association of Puget Sound

Screen for Success
Wednesday, March 12, 2008

Speaker: Tamara Simon, owner of Koss Property Management and a licensed Real Estate Broker since 1983.

Location: RHA Conference Room
529 Warren Ave N
Seattle, WA

Time: 3:00pm – 6:00pm

Cost: $45 for members

Come learn practical useful information on how to screen and select the winners from the losers. This class is more than learning to read a credit report. It helps you from knowing how to effectively advertise and show your rental, to the final step of renting it to your new tenant!

$435,000 Ballard home: only $900 a month

But only if you’ll send a check to Rev Robin Beaty in West Africa. I just put up a post on the Estately blog, but I thought I’d alert the RCG community to the more-humorous-than-dangerous side of real estate scamming (Reba keeps it real with the scary real estate scamster stories).

We received the following by someone clearly looking for a good deal on Seattle rents ($900 for a Ballard 2BR is tough to pass up).


Our hot tipper goes on to wish, as I do, that people had the common sense to avoid scams like this. Word to the unwise: don’t send the dude your money.

Landlord 101 class offered February 26th by RHA

An excellent class that is offered through the Rental Housing Association is coming up soon. Tamara Simon of Koss Property Management has a been a long time owner of her own business and well respected colleague in the real estate industry and a professional that we’ve referred many a client to for help with their rental property management needs:

Landlord 101
by: Tamara Simon, owner of Koss Property Management and a licensed Real Estate Broker since 1983
Wednesday, February 27, 2008
Location: RHA Conference Room, 529 Warren Ave N, Seattle, WA
Time 3:00pm – 6:00pm
Please RSVP before Wednesday, February 26, 2008

Being a landlord can be a scary experience. Come learn practical, useful information on how to manage your rental property. Knowledge is power, get the tools you need to become a more effective landlord. Simon’s “Ten Commandments of Property Management

Got renter's or condo unit insurance?

I’m constantly amazed at how many people don’t get renter’s insurance when they are renting a house or apartment. Did you realize that if a major catastrophe happens to the property you’re renting that the landlord is not responsible for your belongings?  You should.

Renter’s insurance is relatively inexpensive for the peace of mind that it will give you. Not only are you covered if a major issue happens to the property and damages your belongings, you can also check to see if the policy will cover you in the event of a break-in. Most people don’t consider the fact that a water heater might blow out and cause flooding to the interior of a property. This event could damage clothing, furniture, or more. The landlord will likely be responsible for fixing or replacing the water heater but they won’t be responsible for your stuff.

A while back we were representing a buyer on the purchase of a 20-unit apartment complex. There were 2 buildings with 10 units each. For some bizarre reason the seller decided to replace the roofs mid-contract. Unfortunately for her it rained right at the time the new roofs went on and 4 units were ruined and more were damaged – along with the tenant’s belongings. Thus began a nasty fight between her and the tenants – several moved out, resulting in lost rents, and others started attempting to boycott the property and prevent others from moving in to replace those that chose to move.

The majority of these tenants did not have renter’s insurance. More landlords are getting savvy and are adding provisions to their lease agreements that spell out a requirement for renters to show proof of insurance within a short period of time of moving in. My own lease agreements have similar language and it states very clearly that I’m not responsible for their stuff if something happens. Nature can impact a property at any time – I had this happen when a neighbor’s tree smashed into my duplex roof a couple of years ago. Thankfully my tenant’s didn’t get impacted but they could have since the tree punctured holes in the roof. Thankfully we got the roof repaired pretty quickly so no major damage occurred but it could have been ugly.

New condominium buildings are also requiring owners and tenants to have contents insurance. For owners of these units the requirement is that the policy cover up to the deductible of the homeowner’s association policy. Frequently that amount is roughly $50,000.00.  These are good things to know. Many of the condo sales require proof of insurance at closing so be sure to contact an insurance company prior to the end of your transaction if you’re in the process of buying. One guy I know that can handle this for you is Gerald Grinter of Gerald Grinter Insurance.  He can handle policies for condo owners and renters.

To Landlords and sellers in City of Seattle – new rules w/ fines… Get up to speed!

Important Fair Housing Notice for Seattle

The City of Seattle has recently adopted a new ordinance that requires all real estate professionals (including brokers and property managers) within the city limits to prominently display a fair housing poster in their place of business. The poster is available at under the link for “Housing Issues.

Too Close to Home

Ardell’s recent blog, Agent FIRED! Lender Fraud, reminded me of one of my first transactions almost seven years ago. I can’t remember how I came across this client or how he was referred to me because I have deleted him from my database. I don’t ever want to provide a mortgage for him or anyone he’s associated with.

This person had contacted me wanting a mortgage for a home just a few doors down from his current residence. He had told me it was for his family members and that it should not receive a non-owner occupied rate. I informed him that currently, there are no special rates and programs for family members (it would be great if…but there’s not) and therefore, the loan is considered a non-owner occupied. He, of course, really wanted the lower rate that an owner occupied home would feature. A week or so later into the transaction, he asked me “What if I move out of my home and into the new home. My family can move into my home.

Am I better off renting?

The last bubble discussion got me thinking – is it really so bad to rent? Well, here is a cold and calculated answer: The Motley Fool has a great calculator to determine whether you are better off renting or owning (financials only, you supply the emotional). Even the bubble hand-wringers amongst us might find some buy-friendly scenarios. Unfortunately, if owning is better for you, the calculator does not help you save up a downpayment.

They also have a how much house you can afford calculator, although it seems to have low-balled my estimate.