Many investors pay cash to purchase residential rental properties. But some take out a mortgage to increase their leverage, says Julie Miller, sales manager at Prospect Mortgage in Irvine, Calif. The benefit is that the investor who holds cash while financing real property can use the cash to make other investments.
Lopatin says low interest rates are also an inducement for investment property buyers.
"If you can take out an investment loan at 4.5 percent and rent out (the property) and make a few dollars a month, annually, the return will be worth the loan," he says. "Not to mention the tax write-offs and other advantages of owning real estate."
Mortgage insurance isn't an option for investment property, so a fat down payment, typically 20 percent or more, is a must.
Investment buyers also need to show that they have enough income and reserves to afford the payments even if the tenant fails to pay the rent or moves out. Lenders typically will count 75 percent of the rent toward the borrower's income-qualifying ratios, Lopatin says. For example, a monthly rent of $1,000 would count as $750 of income.