Uptown Realty & Management
Licensed Real Estate Brokers | Property Managers
Spoiler alert: Uptown Realty & Management is neither a law firm nor an accounting firm. We are just experienced realtors with lots of investment property experience. Always consult your attorney and accountant in these matters.
While many people consider owning a primary residence a feather in their cap, there are folks out there who want to take the next step and own an investment property as well.
If you’re a novice, it’s likely you have questions. If you’ve done it before, it doesn’t hurt to review some investment property basics and sharpen your property-owner skills.
Is it true that I must have two years of landlord experience? What if this is my first time?
Freddie Mac and Fannie Mae differ on this rule. Freddie requires a borrower buying an investment property to show two years of landlord experience, through tax returns, in order to count projected rent as income. Fannie Mae says it’s still possible to buy an investment property and use a portion of income to qualify without having a two-year history.
Can I buy with partners that I am not related to? Is there a maximum number of partners allowed?
Yes you can buy with partners who aren’t your relatives.
Can I buy in an LLC?
No, the general rule is that homes may only be purchased by individuals, not LLCs or other business structures. It is possible to transfer the property to an LLC after the purchase is completed.
Are gift funds allowed?
No gifted funds are allowed. The minimum 20-25% down payment for an investment property must be 100% from the borrower’s own money.
How much is needed in reserves?
While some lenders require investors to show four months worth of principal, interest, taxes, insurance and homeowners association dues, some lenders require more. Many lenders require six months of payments (including taxes and insurance) plus an additional two months of house payments in reserves for every non-primary residence that a person owns.
Are the requirements different if I want to buy a condominium?
There are some added hurdles in the loan process if you’re considering a condominium. First, 51% of the complex needs to be either owner-occupied or a second home, since the agencies will not allow you to buy a share of a complex
that is solely for investment. Next, the homeowner’s association must prove that it’s in good financial standing or that it has enough in reserves if repairs are needed. In addition, a statement from the condo association is required to show
no lawsuits exist among current owners and/or the association. There are some very specific documents that will be prepared by the HOA prior to the completion of the sale.
How is the rental income counted?
For new investment property purchases, income will be calculated based on the lesser of the rental income stated on the lease agreement or the appraiser’s opinion of what can be expected for a specific market. Once that’s established,
the lender will reduce that amount by another 25% to determine qualifying income.This provides the lender with a conservative amount that factors in potential vacancy periods.
Rental property is a business thus most expenses are deductions from the income you generate. In addition you are going to be able to deduct from your rental property income something called depreciation. In short, it is roughly 4% of
the acquisition cost of the property. Your accountant should be consulted in all matters tax related.
What is a 1031 exchange?
When it comes time to sell your rental property you might be a little shy about paying a large portion of the proceeds to your old Uncle Sam. Something called capital gains can be postponed, or even avoided entirely, by performing a 1031
In short, when you sell your property you do it through an organization called an exchanger. They collect the proceeds of the sale (very important) and then, at your instruction and in a very specific time period, purchase another more expensive investment property.
Once the exchanger owns the property they deed it to you and the capital gain created by the first sale is not tucked neatly in the new property. You will not need to pay the tax until this new property is sold. It bears mentioning that the sale of that property can be done through an exchange as well. Who ever said you can’t die with it didn’t consider Sec 1031 of the tax code. If you pass on and own property with gains buried in it those gains disappear and your heirs receive the property at the prevailing value without the gains. Again, consult your attorney and accountant in these very delicate matters. The devil truly is in the details.