Types of Investment Properties
Single Family Residence (SFR)
The most common type of home, also known as single family detached. An SFR is a standalone structure with its own lot — unlike condominiums, townhomes, cooperatives and multifamily homes are all attached residences.
A type of home or building with multiple units owned by one or more parties, such as condominiums and duplexes.
A condominium or condo is one of a group of housing units where you would own an individual unit and then rent or sell it to a another individual. Individual units normally share walls. Condos include no individual ownership of a plot of land. All the land is owned in common by all the owners. Usually, exterior maintenance is paid out of homeowner dues collected and managed under strict rules.
Planned Unit Development (PUD)
A PUD is a housing development not subject to the area’s standard zoning requirements. With permission from the local government, a developer establishes criteria that determine private and common areas and building guidelines. These may include street lighting designs, street width, architectural styles, building height standards, landscaping, land coverage ratios, common area park or amenity requirements. Planned unit developments are often used to cluster homes closer together than allowed by zoning laws.
Apartment Complexes / Commercial Properties
Properties larger than four units are considered commercial properties and can be treated differently than residential properties. Securing a loan for a commercial property typically requires a higher down payment and may require you provide a business plan and long-term projections to ensure profitability. Interest rates are usually higher than those for residential mortgages, but many types of financing are available.
Quick Tip: Determine Your ROI
Before you can invest in an income property, determine whether there’s money to be made in your local market.
Types of Investment Properties
Fixed Rate Loan
Conventional financing for investment properties includes fixed-rate financing. The interest rate stays fixed for the entire term of the loan. A loan term is the length of time the loan is amortized. The most common is 30 years. 25-, 20-, 15- and 10-year terms are also available. Fixed-rate programs are offered on all property types and are the most popular of the available loan types.
A conventional loan, or conforming loan, is a loan that follows guidelines and conditions set by government-sponsored entities Freddie Mac and Fannie Mae. It’s a loan that isn’t guaranteed by a government agency, such as FHA or VA. Conforming loans are limited to $417,000 and can be fixed loans, ARMs or balloons programs.
A conventional loan can be obtained on an investment property with 20% down, but many lenders require 25% or more depending on the loan you choose.
Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) for investment properties aren’t available for government insured (FHA) loans. ARMs have an interest rate that adjusts based on a published index. Many ARMs have a fixed rate for a portion of the term and make adjustments after that period. An example is a 5/1 LIBOR ARM. This program has a fixed interest rate for five years. After five years, the rate adjusts annually based on the London Interbank Offered Rate (LIBOR). There are many ARM programs available to choose from when investing in property.
Balloon Loans aren’t available for government insured loans (FHA). Balloons are amortized over a 30-year term, but are due in full at the end of the program. An example is a seven-year balloon. This loan would be amortized over 30 years, but due in full at the close of seven years, either as a cash payoff, sale or refinance of the property. Property types available for this program include all 1 to 4 unit residences (multifamily residences), condos and planned unit developments (PUDs).
Consider a construction loan if building your own investment property. There are two types of construction loans:
- A one-time close construction loan is a combination of a long-term loan, lot loan and a construction loan with one closing. The long term loan is closed before construction can begin. A Construction Rider is attached to the Security Instrument and Note during the construction phase, which states the terms of the construction loan. At the end of the construction term, this Construction Rider dissolves and the mortgage becomes a fully amortizing loan.
- A two-time close construction loan involves a closing prior to construction and a second to refinance your construction loan into permanent financing.
Be sure to investigate thoroughly to decide which program best suits your needs.
There are two types of lot loans:
- Loans for unimproved land or raw land: Unimproved or raw land has no added improvement — no sewers, utilities, streets, curb or gutter. Loans for unimproved or raw land typically require a higher down payment and interest rate.
- Loans for improved land: Improved land is zoned for your intended use and has or is getting improvements. It can be easier to finance loans for improved land. Loans usually carry a 10 to 15 year term and require 20 to 50% down.
Quick Tip: Know Your Goals
Use the same bank for your lot and construction loan and let them know your plan. This may incent the bank to give you credit for fees paid on your lot loan toward your construction loan.
Defer Capital Gains When Selling an Investment Property
If you’re planning on selling an investment property, you may face a large capital gain subject to federal and state taxes. A tax-deferred exchange under Section 1031 of the Internal Revenue Code allows you to sell investment properties and acquire "like-kind" properties while deferring federal, and possibly state, capital gains taxes.
In order to receive tax-deferred treatment, an independent party must act as a qualified intermediary (QI) or accommodator to hold your funds from the time you sell your relinquished property and purchase a replacement property.
Until recently a QI could be any person or firm not associated with the investor, with no licensing or other qualifications required. With recent QI failures, some states now have regulations in place. Utah has no active regulation program. Always investigate your QI thoroughly.
Quick Tip: Qualifying Exchange Properties
Real property in an exchange is land including any buildings intended to generate a profit. Property located outside the US isn’t considered like-kind property located in the US.