With today’s lower home prices, a steady inventory of homes to purchase and moderate interest rates, it may be a great time to look into buying a rental property to have sustainable equity and income in the future. Whether you are buying this second home as a family vacation destination or as a source of income, there are some things to keep in mind.
Unlike government loan programs, conventional loans can be used to purchase a second home or a rental property. Interest rates and down payment requirements are higher when financing a rental home, but the conventional loan remains one of the few programs available to purchase this kind of property.
2. Location, location, location
As with any real estate purchase, location matters. In the case of rental or investment properties, location also affects your loan options. Fannie Mae and Freddie Mac have specific rules and requirements with second home financing requirements.
For example, the second home purchase needs to be at least 100 miles from the primary home of the buyer to qualify for second home financing. If the property is less than 100 miles away, it may only qualify for investment home financing. One exception to this rule is if the second home purchased is a waterfront property or is located in a resort. In this case you can still qualify for second home financing regardless of location.
3. Property ownership limits
Although there is no limit to the number of properties you can own. You can only have a limited number of properties with mortgages. The rule is that you can’t own more than 10 properties with mortgages including your principal residence when you finance an investment property.
My advice is to talk to a mortgage expert to determine the best loan strategy and long-term plan for any investment property, rental home or vacation destination. As with any investment, buying a second home needs to fit into your overall financial plan.