A reader is in the right financial position to invest in real estate but isn’t sure about the right loan to do it.

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I’m lucky enough to work for a tech company that deals with virtual commerce, so I not only have a job, I’m getting paid overtime. I want to buy a house while interest rates are so low, fix it up, and flip it. There’s no shortage of advice online for doing that, but I can’t find anyone I really trust you to answer this question: What’s the best mortgage for me, given that I want to sell the place in a year or less?

– Zach in California

Laura Adams, author, and host of the Money Girl podcast responds …

Zach asks a good question because selecting the right mortgage for an investment property can help boost its profitability. Plus, lenders have more strict underwriting standards for a non-owner-occupied property compared to a standard home loan.

Here are six tips for getting a mortgage on a property that you intend to sell in the short-term

1. Review your credit

Lenders may also require higher minimum credit scores to qualify for a mortgage on an investment property. It’s another effort to mitigate the risk of making a loan to an owner who doesn’t plan to live in the property.

2. Prepare to pay a higher down payment

The typical minimum down payment for a mortgage on a single-family investment property is 25%. For multi-family properties, it could be a minimum of 30%. Because investment properties come with more risk to lenders, they require a higher down payment to offset it.

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3. Expect higher interest rates

Interest rates on an investment property mortgage are generally higher than for a standard home loan. The rate depends on various factors, including the type of property, its purchase price, your down payment, and credit. You might pay approximately 1% to 3% more in interest than if you were planning to make the property your primary residence.

4. Have a cash reserve

In addition to proof of income, lenders expect borrowers who apply for investment property mortgages to have cash reserves. For instance, if you plan to make repairs and flip a property, they may require you to have cash on hand.

5. Watch out for loan prepayment penalties

In most states, prepayment penalties are legal within the first three years after you get a mortgage. They’re capped at 2% of your outstanding loan balance for years one and two. For year three, they’re capped at 1% of the balance.

For example, if Zach sold a house one year after getting a $200,000 mortgage to buy it, he could get charged up to $4,000 in prepayment penalties. That could take a massive bite out of his investment profit. To avoid this charge, ask your lender for loan options that don’t come with penalties.

Compare rates before you Purchase or Refinance.

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6. Avoid paying points

Getting a lower interest rate on a mortgage could end up costing you more if it comes with points. They’re upfront fees that lenders frequently charge in exchange for lower interest rates. While paying points upfront can be an excellent way to reduce your monthly payment on a 30-year mortgage, it won’t help you save money for a loan you plan to pay off in a year.

When you plan on having an investment property mortgage for a short period, what really matters is the total cost of the loan, such as closing costs and monthly payments, you incur before selling the property. Paying as little as possible for an investment mortgage will help you pocket more profit on the deal.

Flipping houses as a side gig can be fun and profitable. Despite the economic troubles caused by the pandemic, the real estate market is strong in many markets.

To learn more about working successfully as your own boss, check out my new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers. There’s never been a better time to build a business and your financial future as a part- or full-time freelancer, independent contractor, or side-hustler in the on-demand economy.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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