An investment property is a real estate purchase made to generate income through rental income or appreciation and is not the investor's primary residence.
The three types of investment properties are:
- Residential: The most common form of investment property, these properties are purchased to rent out to tenants and earn monthly rentals. These can include single-family homes, apartments, condominiums, or townhomes.
- Commercial: These are properties purchased for business purposes, such as office space, retail stores, restaurants, etc. The investor may purchase an already existing property or develop from the ground up.
- Mixed-use: These properties can be used simultaneously for residential and commercial purposes. For instance, the ground level may be used for retail shops and the upper floors for residential units.
If you are looking to purchase an investment property without requiring proof of personal income through tax returns or pay stubs, you may want to consider a Debt Service Coverage Ratio or DSCR loan. A DSCR loan is a type of non-QM loan that looks at the net income from the investment property to determine the ability to pay back the loan.
The DSCR is calculated by taking the property’s net operating income and dividing it by the total debts and expenses incurred (including the principal and interest payments on a loan). For example, if you are looking to purchase a duplex and the net operating income is $20,000 and the debt service is $14,500, the DSCR would be approximately 1.38. The larger the DSCR, the better for the borrower. Most lenders require DSCRs of at least 1.25. Down payments can be as low as 25% with the right DSCR and credit score.
If you would like to learn more about purchasing an investment property with a DSCR loan, talk to the experts at a NASB at 855-465-0753 or click here for more information.