Buying an investment property: What you need to know
Quick insights
- An investment property (also known as non-owner occupied) is defined as any property owned for the purpose of generating income for the owner, not just long-term income.
- Financing investment properties often need higher down payments and comparing loan options is essential.
- There are pros like tax benefits and cons like management challenges and income variability.
What is an investment property?
An investment property is a piece of real estate you or a group of people own to profit. This might mean a monthly profit from renting out your property, or a profit down the line when you eventually sell.
It’s important to distinguish the difference between an investment property, flipping a house and a second home. Buying a fixer-upper, flipping it and selling it are usually not the same as an investment property because it yields short-term gains.
The strategy behind an investment property is usually long term—you intend to hold on to this real estate for the long haul and it isn’t where you reside, like you would in a primary or secondary home.
The IRS differentiates tax benefits between a second home and an investment property.
If you rent a second home and also use it personally, special tax rules may apply. The IRS generally considers the property to be used as a residence if personal use exceeds the greater of 14 days or 10% of the days it is rented at a fair rental price. Rental income generally must be reported, and expenses may need to be divided between personal and rental use. Consult a qualified tax professional regarding your circumstances.
That is why an investment property is not usually somewhere you, the owner, would be living. Please consult with a tax professional for any questions.
Why consider an investment property
As with any investment, real estate involves risk, and income, property values and investment returns may fluctuate. Carefully consider your financial goals, costs and risk tolerance before investing. There is no guarantee in any investment. However, if real estate fits you, know that returns can vary widely and depend on factors like location, financing, expenses, vacancies and market conditions.
If you rent the property for profit, qualifying mortgage interest and certain other ordinary and necessary rental expenses may be deductible from rental income, subject to applicable tax rules and limitations. Consult a qualified tax professional regarding your circumstances.
Depreciations may be annual income tax deductions. You can go to the IRSOpens overlay, or contact your personal tax advisor to learn more about how your investment property might qualify.
Common mortgages for an investment property
It’s more common and usually more cost-efficient for people to finance a primary residence only. But if you are in the position to invest, there are a few things you can do. Down payment requirements for investment properties are often higher than for primary residences, and the amount can vary based on the loan type, property type and lender requirements. Lenders will accept a wider range of down payments for primary residences because there is less risk.
Getting preapproved
As with any home, it is helpful to get preapproved for a mortgage. To be sure you're getting the best deal, talk with multiple lenders and compare their mortgage interest rates and loan options.
With preapproval, the loan officer will ask for information about your income, job, monthly bills, the amount you have available for a down payment and possibly some other information. They will then provide you with an estimate.
Investment loans
There are various loan programs to consider with a real estate investment. It’s important to remain cautious about your debt, but it is good to know that there is help if you need it. Here are a few examples:
- Conventional loans from a bank, like what you’ve probably used for primary real estate.
- Home equity financing. Some lenders may offer home equity loans that allow qualified borrowers to use a portion of their available home equity to help fund an investment property. JPMorgan Chase Bank, N.A., does not offer home equity loans. Product availability, borrowing limits and approval requirements vary by lender.
- Find investors. You may have friends, family or colleagues in your network who are interested in a real estate investment and would be willing to help finance.
Using savings rather than borrowed funds may reduce financing costs and debt-related risk, but the appropriate strategy depends on your financial circumstances and investment goals. Consider consulting qualified financial, tax and real estate professionals before proceeding.
How to find the right investment property
There are many things you should consider when finding the right investment property for you. Here are a few things to ask yourself:
- What does the market look like? It is important to remain up to date with real estate trends.
- Try to make sure you’re coming in at a time that is financially sound for you. Acting on emotion is not recommended but remaining proactive and reactive to market trends is.
- Where do you want to buy?
- Where is smart to buy?
- How much can you afford?
- Do you want to invest alone or as a group?
- How much could you charge as a rental?
- How much do other homes cost in the area?
- Does this area have a high rate of appreciation if you’re looking to sell?
- What kind of attractions and job opportunities are around?
- Is this a vacation destination? If so, how can you remain competitive with other rental properties nearby?
If you know someone who has invested in real estate, it might be helpful to pick their brain. Knowledge is power!
The pros and cons of an investment property
As you can see, there are pros and cons of buying an investment property, and many of them depend on your personal circumstances.
Potential pros of owning an investment property
- Potential tax benefits
- Opportunity for passive income
- Probability of long-term appreciation
- Could be a steady, dependable place to put a surplus of cash
Potential cons of owning an investment property
- Can be a challenge to finance
- Income might ebb and flow with rental trends
- Additional management and upkeep responsibilities
- Potential lack of liquidity and unforeseen costs
Investing in real estate could be a good option for you if you have the resources to do so. It can also be a bit of a challenge before you see the fruits of your labor. Speak with your Home Lending Advisor to learn more about investment properties.
