Buying an Investment Property in the US: The Complete Guide

Your All-in-One Guide to Buying US Investment Properties

Buying an investment property in the US can be a powerful way to build wealth. Whether you’re an experienced investor or just starting out, this guide will prepare you with all of the information and strategies you need to know to navigate the US real estate market. If you’re a foreign investor looking to diversify your portfolio into the US market, we’ve got you covered too. 

Keep reading to discover the ins and outs of buying US investment properties.  

Why Buy an Investment Property in the US?

Real estate investors from around the globe have invested in US real estate, but why? 

When you look at the US’s position in the global economy, it’s consistently ranked as the world’s largest economy. As a result, the overall housing and job markets continue to grow in the US. Taking a look at the numbers, the median sales price of a home in the US has increased 51.44% over the past 20 years. This makes the US an ideal market to gain exposure to if you’re looking to diversify your portfolio as a foreign investor. You can expect relatively stable returns with steady home value appreciation. 

On top of the general benefits of the US real estate market, buying an investment property allows you to build generational wealth in several different ways, including:

• Capital appreciation
• Short-term rental income
• Long-term rental income
• Tax benefits

Whether you decide to flip a home quickly for a profit or hang onto a property for 30 years while collecting rental income, you would benefit either way. There’s no one “right way” to invest in real estate, which leaves plenty of different options for real estate investors. 

Who Can Buy Investment Properties in the US?

Anyone can buy an investment property in the US as long as they have strong financials, including foreign nationals. There’s often a misconception surrounding the difficulty of qualifying for a conventional loan when it comes to buying an investment property regardless of whether you’re a US citizen or not. Although it’s true that conventional loans can be tough to qualify for, private mortgage lenders, like us at Defy, have created alternative, tailored solutions to make it easier for real estate investors and foreign nationals to qualify. 

Where Can You Get a US Investment Property Loan?

While you could try to go through the tedious process of qualifying for a conventional loan for an investment property, there are some alternative loan options that can be a better fit. These other options are typically not offered by traditional banks or credit unions, but can be found through private mortgage lenders. Getting a loan that’s specifically tailored for investment properties and foreign nationals can make it much easier and faster to qualify. 

Below, we’ve outlined the top US investment property loan options: 

• Debt-Service Coverage Ratio (DSCR) Loans: Uses the property’s DSCR to determine eligibility rather than the borrower’s personal income. The DSCR is calculated by dividing the property’s net income by its debt obligations. This number gives lenders an idea of whether a property can pay off its own mortgage. 
• Fix-and-Flip Loans: Designed for real estate investors who want to “flip” a property. This involves buying a home that needs some work, fixing it up, and selling it relatively quickly for a profit. Due to the timeline, these loans have shorter terms than other loan options. 
• Construction Loans: Designed for those who are looking to build a property from the ground up, which not only suits investors but also individuals who are looking to build a custom home. The proceeds of the loan are released in installments as the project progresses. Similar to fix-and-flip loans, construction loans also have a shorter term. 
• Foreign National Loans: Ideal for non-US citizens and non-US permanent residents who are looking to finance a property. These loans are unique since they usually don’t require a US Social Security Number (SSN). This feature can also be built into other loan types depending on the lender – for example, at Defy, our DSCR loans allow foreign nationals to qualify. 
• Interest-Only Options: This loan is built with an interest-only period, which is typically the first five to 10 years of the loan. During this time, borrowers are only required to pay the interest instead of both the interest and principal. This feature can make it easier for real estate investors to manage their cash flow and redirect the difference in monthly payments to other investments. 

These loan options are categorized as non-qualified mortgage (non-QM) loans, which means that they don’t need to meet the strict lending standards set by the Consumer Financial Protection Bureau (CFPB). This makes it easier to qualify for these loans for an investment property compared to a conventional loan. 

Depending on what you plan to do with the property and your specific situation, one of these loan options might be better for you than another. For example, if you plan to buy a property to fix it up and sell it quickly for a profit, a fix-and-flip loan may work best. However, if you plan to buy a property to make it into a rental, a DSCR loan could work better since it lets you qualify with the property’s income rather than your own. 

It’s great to have all of these options available, but it could also get overwhelming if you’re not sure which option is right for you. Defy can help – contact us today and we can help you determine which option is right for you. 

Investment Property Interest Rates

Interest rates for an investment property can vary depending on a few different factors like the type of loan you choose, the lender, your personal finances, and the current market rates. Regardless, the investment property interest rates tend to rise and fall in a similar pattern to the standard 30-year-fixed mortgage rates that are available. 

If you decide to go with a non-QM loan to finance your investment property, it’s important to keep in mind that interest rates will usually be slightly higher than conventional mortgage rates. However, it can be far more difficult to qualify for a conventional loan for an investment property, making these slightly higher rates worth it to gain exposure to the housing market. 

How to Get a US Investment Property Loan

The process of getting a US investment property loan is identical to getting a loan for a primary residence. Generally, these are the steps you’ll have to go through to secure the loan:

1. Research and Choose a Lender: Shop around for lenders who specialize in investment property loans. Evaluate them based on factors like loan options, interest rates, fees, and customer service. 
2. Get Pre-Approved: Once you’ve chosen a lender, you can apply for a pre-approval with them. Getting pre-approved will help you stick within a predetermined budget and it’s a signal to sellers that you’re a serious buyer. 
3. Find Your Dream Investment Property: Start your property search while considering your investment goals and budget. Look for properties that have rental potential and potential for value appreciation. 
4. Prepare Your Application by Gathering Documentation: Put together your application with any documents that the lender requests like identity documents and proof of income. This step can vary greatly between lenders and loan options. 
5. Submit a Formal Application to the Lender: With the documents you’ve gathered, submit a formal application to your chosen lender. 
6. Underwriting and Approval: Once your application and documents have been submitted, the lender will assess both your finances and the property. When they approve the loan, you’ll get a letter that states the interest rate and loan terms.
7. Closing: This is where the closing documents are signed and all of the closing costs must be paid. Once that’s all done and dusted, the loan is finalized and you officially become the property owner! 

Investment Property Loan Requirements

Since investment property loans encompass a variety of different loan types, requirements depend on which one you decide to get. For example, a DSCR loan will have significantly different requirements than a construction loan since DSCR loans use the property’s income as qualification criteria, but construction loans do not. When shopping for a lender, you should also be shopping for a loan that would be a good fit for you. Then, ask the lenders for their qualification requirements for that specific loan, so you can get a better idea of what you would need to qualify. 

Investment Property vs. Primary Residence

In a nutshell, your primary residence is your main home where you live, whereas an investment property is meant for generating income whether it’s rented out to tenants or you hold onto it for capital appreciation. Neither one is better than the other – it just depends on what your goals are for the property. 

Beyond just the different purposes, financing is slightly different too. When it comes to financing, it usually tends to be more difficult to qualify for financing for an investment property compared to a primary residence. Luckily there’s ways around this, like by going with a loan from a private mortgage lender instead, making it easier to qualify than with a conventional lender. 

Investment Property vs. Second Home

Oftentimes, people think that these two terms are interchangeable, but they are, in fact, different. While both investment properties and second homes are not your primary residence, their key difference is how they’re used. Investment properties are all about generating income through rent or capital appreciation. On the other hand, second homes are for your personal leisure and enjoyment – they’re used for vacations or getaways throughout the year. 

Another main difference lies in the deductions you can make with each type of property. With a second home, you can deduct the interest payments you’ve made throughout the year if you decide not to take the standard deduction. Whereas with an investment property, you can deduct the interest payments on top of any related business expenses – things like repairs and property management. 

If you have an investment property that is sometimes used as a vacation home, we would recommend speaking to an accountant about how to write off your business expenses. 

Top US Cities to Buy an Investment Property

The US is a big place and choosing a place to buy an investment property is an important decision if you’ll be spending your hard-earned money on it. Naturally, there are some cities in the US that are better suited for a real estate investment than others. 

Taking into account factors like population growth, employment opportunities, housing demand, and appreciation potential, here are the top 10 US cities to buy an investment property: 

1. Austin, Texas: Booming tech hub with a strong job market, attracting young professionals and driving rental demand. Potential for appreciation due to constant growth.
2. Atlanta, Georgia: Major business center with a diverse economy. Affordable compared to coastal cities, offering good rental yields.
3. Los Angeles, California: Perennially strong rental market due to limited housing availability and high population. Investment in a global city with potential for long-term appreciation.
4. St. George, Utah: Fast-growing tourist destination with a beautiful natural landscape. High short-term rental potential and potential for appreciation in a growing market.
5. Miami, Florida: International gateway with a thriving tourism industry. Strong rental market fueled by tourism and a growing population.
6. Reno, Nevada: Booming entertainment and recreation destination. Relatively affordable market with potential for appreciation as the city revitalizes.
7. Columbus, Ohio: Stable and diversified economy with a large and growing population. Relatively affordable market with good rental yields.
8. Nashville, Tennessee: Thriving music industry and tourism center. Fast-growing city with a strong job market, leading to high rental demand.
9. Phoenix, Arizona: Major business center with a large and growing population. Warm climate attracts retirees and boosts rental demand.
10. Fort Worth, Texas: Strong job market due to the energy sector and transportation hub. More affordable alternative to Austin with a growing population and potential for appreciation.

Things to Consider Before Buying a US Investment Property

Just like with any decision, there are some things you should consider before buying an investment property in the US. Below, we’ve outlined a few of them:

Your Financial Situation

One crucial factor that some people tend to overlook is their financial situation. Before diving into buying an investment property, it’s important to look at your financial health. 

Firstly, assess your available cash and make sure that they can comfortably support the investment without jeopardizing your financial stability. Upfront costs to consider are the down payment and closing costs, but you should also have a buffer for any unexpected repairs or vacancy periods. Next, if you’re applying for a loan where your debt-to-income (DTI) ratio will be used by the lender, aim to get this number within the lender’s requirements. Lastly, conduct a cash flow analysis to determine if your property will generate a positive cash flow. Be sure to include all possible expenses like mortgage payments, property taxes, insurance, and maintenance to get an accurate picture. 

At the end of the day, an investment property is still a massive financial decision that should not be taken lightly. 

Researching Potential Markets

You often hear people working in real estate say, “Location, location location!” And that’s for good reason. The location of the property is imperative to the success of your investment. 

Think about prioritizing areas with a growing population, job market, and limited housing availability. These factors could indicate a potentially strong rental market with opportunity for property appreciation. Once you’ve narrowed it down to a few options, research the local landlord-tenant laws, any rent control ordinances, and property taxes in that city and state to make sure you have the full picture before purchasing an investment property there. 

With the right location, you’ll have a leg up in reaping those investment gains. 

Setting Investment Goals

Defining your investment goals can help you choose the right property. Some key questions to ask yourself are:

• Do I prioritize immediate rental income or long-term capital gains? 
• Am I looking for a short-term investment to flip or a long-term hold to build wealth over time?
• What is my risk tolerance when it comes to market fluctuations and vacancy periods?
• Will I be actively involved in managing the property or will I hire a property management company?

Being realistic about your investment goals will help you to maintain your expectations and plan for any hiccups along the way. 

Choosing the Right Property

Just like location, choosing the right property can be essential to your success. If you’ve already settled on a city and state, start researching neighborhoods in the area with high rental demand. Then, start thinking about the type of property you’d like to get since the property type you get will appeal to different demographics. For example, if you buy a 4-bedroom single-family home in an area that has renters who are predominantly single young professionals, you might have trouble finding a tenant. Lastly, if you plan to manage this property remotely, look around for property management companies that can help on-site.

Finding Financing

Financing can be harder to get for an investment property compared to a primary residence if you’re going with a conventional loan. They typically require higher down payments and interest rates for investment properties, not to mention that the process can take a while. Beyond that, it can be even more challenging to get financing if you’re a foreign investor. 

Luckily, there are financing options through private mortgage lenders that make it much easier and quicker to close on a US investment property loan. The loan options provided by private mortgage lenders tend to have more favorable qualification requirements, making it possible to secure a loan for those who can’t qualify for a conventional loan. If you’re a foreign investor, this applies to you too – many private mortgage lenders, like us at Defy, offer Foreign National Loans. There are plenty of ways to find hassle-free financing to fund your next investment. 

Down Payment Requirements

Compared to primary residences, investment properties tend to require higher down payments. This goes for whether you choose a conventional loan or a non-QM loan through a private mortgage lender. You can expect to put down anywhere from 15-30% depending on the lender and your loan application. 

Tax Implications

Whether you’re a foreign or domestic investor, you’ll have to pay taxes on the income generated by your property, along with property taxes. Foreign investors also have to consider the Foreign Investment in Real Property Tax Act (FIRPTA) that requires foreign sellers to withhold taxes from the sale of the property, which could add a layer of complexity to the transaction. 

However, on the bright side, any expenses incurred from maintaining your investment property can be tax deductible. This could include interest payments, maintenance, repairs, and property management fees. Although this doesn’t mean you’ll avoid taxes completely, it could help you reduce your tax burden. Since everyone’s situation is unique, we highly recommend speaking to your accountant to further discuss the tax implications of your investment.

FAQs

1. What is an investment property?

An investment property is real estate that’s bought with the intention of making money, whether it’s through collecting rental income or appreciation in value. 

2. Why buy an investment property in the US?

The US has been the world’s strongest and largest economy for more than 130 consecutive years. Buying an investment property in the US offers the potential for stable returns, options for everyone’s budget, and exposure to a robust real estate market. 

3. Can investment properties reduce taxes?

Yes, investment properties may offer tax deductions for things like depreciation, repairs, property taxes, interest paid, and other necessary expenses to keep the property up and running. 

4. How much investment property can I afford?

How much investment property you can afford depends on factors such as the type of loan you apply for, credit score, and income. If you choose to go with a DSCR loan, then the property’s income will be used to determine the DSCR ratio for eligibility. To give you a rough estimate of what you may be able to afford, check out our mortgage calculator. 

5. Who should consider getting an investment property in the US?

Anyone who has stable financials and wants to gain exposure to the US real estate market should consider getting an investment property in the US. This includes foreign nationals who are looking to diversify their holdings. 

6. What type of investment property should I buy?

The type of investment property that you should buy will depend on several factors like your desired location, budget, and investment goals. For example, if you’re looking for a fix-and-flip, try finding a property at a lower price point that needs some updating or TLC. The large value-add will give you a bigger opportunity for profit. However, if you’re looking to make a property into a short-term rental, it might be more beneficial to find a property that has already been updated to start renting it out right away. 

7. Where should I buy an investment property in the US?

There’s no right or wrong place to buy an investment property in the US. Some location factors to consider when doing your research are:

• Population growth
• Job market
• Strong rental demand
• Appreciation potential

8. Where can I get an investment property loan as a foreign investor?

As a foreign investor, it can be difficult to qualify for a conventional loan in the US. However, private lenders, like us at Defy, often offer loan programs for foreign nationals, making it easier for non-US citizens to secure a home loan even without a US credit score. 

9. Is it hard to get a loan for an investment property as a foreigner?

No! Getting an investment property loan as a foreigner isn’t hard. While it might seem hard to do with a conventional loan, private lenders, like us at Defy, offer alternative paths to homeownership in the US through our Foreign National Loan program. 

10. What are the investment property loan interest rates?

The interest rates for investment property loans depend on the lender, your borrower profile, and the current market conditions. It’s important to note that if you are a foreign national, you may face slightly higher interest rates when financing a property in the US. However, keep in mind that this minor difference in interest rates opens up the door to a potentially lucrative opportunity in a strong real estate market. 

11. What’s the difference between an investment property and a primary residence?

An investment property is a property that’s primarily used to generate income, such as a rental property. A primary residence is a property that you use to reside in yourself and is also often referred to as an owner-occupied property. 

12. What’s the difference between an investment property and a second home?

The main difference between an investment property and a second home is that an investment property generates income, whereas a second home does not. A second home is typically used for personal purposes, such as a cottage that you and your family would use over the summer for leisure. 

13. What are US investment property loan requirements?

The loan requirements will depend on the lender and the type of loan you apply for. While specific requirements may vary, these are some criteria that foreign borrowers will generally need to meet:

• Has good credit report/history from their home country or the US
  • Depending on the applicant’s US credit history, an International Credit Report may be required
• Has the necessary documentation needed for pre-approval (more on that below)
• Has verifiable income with a stable work history
  • Two years of employment history
  • Income statements
• Can pay for the down payment, which is typically between 20-30% of the purchase price
• Has liquid cash reserves to cover closing costs and several months of mortgage payments

14. Do I need a US credit score to qualify for an investment property loan?

No, you do not need a US credit score to qualify for an investment property loan if it’s a loan program that’s designed for foreign nationals. While you might not be able to find these types of loans at a regular bank or credit union, private mortgage lenders, like Defy, offer these options. 

15. Is it possible to get an investment property loan with no down payment?

No, unfortunately, a down payment of 20-30% is typically required for foreign nationals purchasing an investment property.