By Heba Baker
Buying an investment property is one of the best ways to build wealth; that is if you do it right. If you invest at the right price, with the right investment property financing, you’ll be set for some positive cash flow. We only say this because monthly mortgage payments could really cut into your profits if you don’t get the best rates. If you want to make the best investments in the 2019 real estate market, learn everything you can about investment property mortgage rates.
US Housing Market 2019: Investment Property Mortgage Rates
One thing you need to know going into this is mortgage rates for investment property are higher than those for primary residences. This is mainly because mortgage lenders take on a higher risk when lending to investors. Because real estate investing is a business, your investment property is considered an asset; this asset can quickly become a liability if it turns out to be a bad investment property. Investors are one third more likely to dump mortgages than homeowners. Lenders know this and for that reason bump up the interest rates.
How Much Higher Are Mortgage Rates for Investment Property?
Generally, investment property mortgage rates are about 0.5–0.75 percent higher than the regular residential rates. But then again the type of mortgage you get approved for can change based on a number of factors. Investment property mortgage rates could be higher or lower depending on your credit-worthiness, your down payment, and the type of property (single family, duplex, etc.) you’re trying to finance.
Mortgage fees also directly affect the final interest rate you have to pay. Fannie Mae and Freddie Mac set the rules and fees for most mortgages today. Remember, the higher the fees, the higher your investment mortgage rates are above current rates.
The down payment for investment property loans is generally higher as well. Most lenders don’t work out a deal with anything below 20 percent down. Agencies have a separate set of fees for primary residences and investment properties. But the bottom line is if you would have received a 5 percent interest rate purchasing your personal residence, that rate for an investment property would be around 5.5–5.75 percent.
Rental Property Mortgage Rates 2019
Zillow expects fixed mortgage rates to reach 5.8 percent in 2019; these are rates we haven’t seen since the market crash in 2008. Higher residential mortgage rates mean even higher investment property mortgage rates.
But like we mentioned above, investment property mortgage rates can differ based on the property type. We gave you a range of 0.5–0.75 percent for single family homes. A duplex may require an extra 0.125–0.250 percent on your rate.
For multi family real estate investors, the 2019 average rate for commercial real estate loans is around 4–5 percent. The average rate for an apartment complex could range from 3–8 percent with an average loan-to-value ratio of 70–75 percent; the lower that ratio, the lower the interest rate, but the higher the down payment.
Your best options at obtaining an investment property loan are regional banks, credit unions, and commercial mortgage companies. However, you need to be prepared to spend some time shopping around for different mortgages to get the best deal. To qualify for a loan and negotiate better terms of the loan contract, you need:
- Good personal credit score
- Proven experience and track record of successfully managing investment properties
- Sufficient cash to put as a down payment and a strong investment pitch
It’s recommended to search for lenders locally; consider local banks and mortgage lenders over national ones.
Types of Rental Property Loans
This is the standard loan, also known as the “conforming” loan. The down payment for a fixed rate/ adjustable rate loan is 15 percent for a one unit property investment; it’s 25 percent down for a two to four unit property. Also, loan terms are usually shorter than the typical 30-year residential mortgage.
If you’re looking for smaller down payments, an FHA or VA loan could be a great option for you. If you buy an investment property with one of these loans however, there’s a catch. The property needs to be a multi family home (2–4 units) and you need to live in one of those units for a certain amount of time. FHA loans come with a minimum of 3.5 percent down payment, whereas VA loans could be as low as 0 percent.
You might not always know what to expect here. Portfolio mortgage lenders can make up their own rules for investment property loans. You can expect to pay more for these. But the upside is you might be able to put less down or finance more investment properties with this type of loan. The type of investment property mortgage rates they set aren’t for certain.
These can be a bit more expensive and complex to set up. The application process for a traditional commercial real estate loan requires a lot of time and documentation to complete. But for those of you who want to buy properties with more than four units, this is an option. Keep in mind, however, that if your credit score isn’t great, or the property needs some renovation, you can expect to pay higher investment property mortgage rates.
The Bottom Line: Investment Property Mortgage Rates in 2019
Making the best real estate investment does require a bit of extra effort to make sure you’re doing it right. Whether that be your investment strategy, rental strategy, or financing method, there can always be room for improvement. A successful investment doesn’t only rely on good investment property mortgage rates. There’s a lot more to it, and Mashvisor can help you with it all. To learn more about how we will help you make faster and smarter real estate investment decisions in 2019, click here.
Originally published at https://www.mashvisor.com on February 5, 2019.