Buying an investment property can be one of the smartest ways to generate passive income and grow your wealth—but it’s also a more complex process than purchasing a primary home. Because lenders view these loans as higher risk, qualifying for a mortgage on an investment property often comes with stricter requirements. Still, with the right preparation and financial strategy, your investment can yield significant long-term rewards.
What is an investment property?
An investment property is real estate purchased primarily to generate income—either through rental payments or by selling for a profit. Unlike a second home or vacation property, the owner doesn’t typically live in an investment property.
Here are three common ways investors use these properties:
•Portfolio diversification: Real estate can help balance your financial portfolio since housing markets are often less volatile than stocks. Plus, property values tend to appreciate over time. You may also be able to deduct mortgage interest as a legitimate business expense.
•Fix and flip: Some investors buy older homes, renovate them, and sell for a profit once the value rises.
•Rental income: Renting out your property—especially in attractive or high-demand areas—can create a steady stream of passive income.
How to Finance an Investment Property
When it comes to financing, most investors turn to conventional loans or specialized products like DSCR (Debt-Service Coverage Ratio) loans, depending on their situation and goals.
Conventional Loans
Conventional mortgages for investment properties follow a similar process to primary home loans but with added requirements:
•Down payment: Expect to put down more—multi-unit properties (like duplexes) may require at least 25%, while single-family homes can often be financed up to 85% of the property value.
•Credit and reserves: Lenders usually require a higher credit score and proof of cash reserves to cover several months of expenses. Larger “jumbo” loans may even demand a year’s worth of savings.
•Rental income consideration: Some lenders count projected rental income toward your qualifying income, increasing your borrowing power.
•Documentation: Be prepared to submit detailed records of your existing investment properties, if any.
DSCR Loans (Non-QM Option)
For seasoned or full-time investors, a DSCR loan can be a more flexible financing path. Instead of verifying your personal income, lenders assess the property’s ability to cover its own debt through cash flow.
This type of loan may suit you if:
•You want to borrow less than $2.5 million.
•You’re investing in a property with up to four units.
•You have short-term rentals or non-warrantable condos that don’t qualify for traditional loans.
Tax Considerations When Selling
Selling an investment property often leads to a capital gains tax on your profit. The exact amount depends on your income and tax filing status, but it can be substantial.
To reduce or defer this tax, many investors use a 1031 exchange—a strategy where you swap one investment property for another of similar value within a set timeframe. When executed properly, this lets you roll your profits into a new property without immediately paying taxes.
Final Thoughts
An investment property can be a powerful addition to your financial portfolio—providing stable returns and potential tax advantages over time. However, success requires planning, proper financing, and a clear understanding of the risks involved. If you’re ready to explore your options, consider consulting a local loan officer or financial advisor to help guide you through the process.
