Investment properties (buying a home with the intent to lease to a tenant) are at all time highs, taking up 20% of all purchase transactions in the last 12 months. Big reason for this is that in today’s environment, the home will cash flow immediately.
Most investors are purchasing properties for $100,000 or less and paying cash for these. Here is what you need to know if you are looking to finance an investment property.
- Residential Mortgage Transactions only apply to 1-4 Unit Properties
- Lenders are typically requiring a 25% down payment
- 10% down payment options available on Fannie Mae HopePath Properties
- Non-Homestead property taxes are about 33% higher than that of a primary residence
- Tighter Underwriting requirements – Need more money in the bank after closing
We have a few years experience owning investment properties, and many more years financing these properties in Michigan. Housing affordability is at all time record levels and interest rates are near historic lows, so now is a great time to be an investor. Call us with questions!
Posts tagged PROPERTY TAX
Purchasing an Investment Property
Cash to close
We believe that all clients need to fully understand what it takes to close on their home loan. Yet the “Cash to Close” has consistently provided confusion in all borrowers’ minds.
There are 3 main components that make out your cash to close:
(Say we have a $150,000 purchase price, putting 10% down).
- Down Payment – $15,000 (Can range from 3% to 20% down or more)
- Closing Costs – $2,500 (Usually between $2,200-$3,000)
- Prepaid Items – $4,613
- TOTAL – $22,113
Prepaid items are certainly the most confusing, and can be divided up into 4 categories:
- Escrow Account: Lender will establish an account to pay your property taxes and home owners insurance ONLY IF you put less than 20% down.
- Property Tax Pro-rations: In Southeast Michigan, property taxes are paid 1 year in advance, so you must reimburse seller for taxes already paid. *Required regardless of down payment amount
- Home Owners Insurance: 1st year policy is always paid in advance and paid 2 weeks before closing. *Required regardless of down payment amount
- Prepaid Interest: You are required to pay for the interest on the remaining days left in the month you close.
In our example, the $4,613 can be broken down into:
- Escrow – 7 months worth of property taxes and 2 months worth of home owners insurance for a total of $1,900
- Tax Pro-Rations – 6 months worth of taxes totals $1,500
- Home Insurance – Premium would be $900 per year
- Prepaid Interest – Say we close on the 15th of the month, you would have to pay the remaining 15 days worth of interest at closing, a total of $313.
Keep in mind the tax pro-rations usually are the most confusing, and some lenders will not include this as it is not a lender related amount. Hope this clears things up.
Tax Benefits of Homeownership
The tax benefits of buying a home include:
Home mortgage interest deduction: The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction. In the early years of a home loan most of the payments consist of interest, so this deduction is particularly substantial during the first years of home ownership.
Depending on the state a home buyer lives in and his tax bracket, this deduction can reduce the cost of borrowing by one-third or more.
Home equity loan deduction: Home owners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. The money can be used for any purpose, such as paying off high-interest credit card debt. In contrast, the interest on credit card debt is not deductible.
Property tax deduction: Home owners also get to deduct from their federal income taxes the state and local property taxes they pay on their home. This is another itemized deduction that renters don’t get!
Deductible home buying expenses: Various closing costs ordinarily involved in a home purchase are also deductible as itemized deductions, including loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.
$250,000/$500,000 home-sale exclusion: Perhaps the greatest tax benefit of owning a home comes when a person sells it at a profit. Home owners who lived in their home for two of the prior five years prior to its sale need pay no income tax on a substantial amount of their profit — $250,000 for single home owners and $500,000 for married home owners who file jointly. This exclusion can be used once every 24 months.
14 days of free rental income: Another little known tax benefit of owning a home is that the home owner can rent it out for up to 14 days during the year and pay no tax at all on the rental income. In contrast, a renter who sublets his or her rental must pay income tax on all the rental income he or she earns.
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