Investing in property is a great way to build long-term wealth, but you will need to get the best mortgage rate for investment property.
As a real estate investor, one of the things you should be on the lookout for when looking for the best investment property is mortgage rates. However, mortgage rates vary depending on several factors. The key to getting the most out of your investment is finding the best mortgage rates available to you in the area of your choice.
Table of Contents
- Mortgage Rate for Investment Property vs Mortgage Rate for Primary Residence
- What Affects the Mortgage Rate for Investment Property?
- 4 Tips to Get the Best Mortgage Rate for Investment Property
- How to Find a Profitable Investment Property in 2023
- 10 Best Locations for Investment Properties
Not everyone who goes into real estate investing is capable of buying a property in an all-cash transaction. A huge chunk of the total number of investors in the country usually applies for mortgages to buy investment properties.
In this blog post, we’ll explore the best tips for finding and securing the best mortgage rate for investment property, so you can get the most out of your investment. We will also show you how you can use an investment property platform like Mashvisor to find the best rental properties that will help you achieve your investment goals.
Mortgage Rate for Investment Property vs Mortgage Rate for Primary Residence
A wise investor knows the importance of shopping around for the best mortgage rate for investment property before buying a property.
For each mortgage application, you will be asked to answer the question of how you intend to use the property you are about to purchase. Generally, you will be given a choice of either using it as a primary residence, a second home, or an investment property. We will focus on mortgage rates for a primary residence and an investment property in this section.
Mortgage Rates for Investment Properties
Mortgage rates are different for investment properties and primary residences. Of the two, the mortgage rates for an investment property tend to be higher than the rates for a primary residence. It is because of the additional risks associated with investment properties.
Mortgage lenders are more likely to incur losses if the mortgage holder defaults on their loan due to a change in the value of the property or its rental income. Therefore, lenders often require a higher mortgage rate for investment property as they seek to offset the potential risks associated with giving out such loans.
As a general rule, mortgage rates for investment properties are usually 0.50% to 0.75% higher than mortgage rates for primary residences. So, make sure to check with multiple lenders to get the best rate available in your area of choice.
For instance, at the time of writing, the prevailing interest rate for a 30-year fixed-rate mortgage on a primary residence is 6.13% APR. It means that mortgage rates for an investment property will fall between 6.63% and 6.88% APR.
Lenders add the surcharge because borrowers who own both a primary residence and investment property tend to bail on the latter when things get rough.
Additionally, mortgage lenders may also require larger down payments and other conditions while setting mortgage rates for investment properties, making them more expensive compared to mortgage rates for primary residences.
Mortgage Rates for Primary Residences
Primary residences, on the other hand, aren’t as high risk as investment properties since they are where you hang your hat at night and call it your home. Typically, you will get the best rates possible on primary residences when taking a loan.
A property qualifies as a primary residence if:
- It is a place where you reside for a bigger part of the year
- It is the legal address you use for your official documents, forms, and tax returns
As mentioned earlier, homebuyers tend to obtain better mortgage rates on primary residences because they are more likely to keep them when times get tough.
Generally, when an investor faces difficult times, like a financial or economic crisis of sorts, chances are they will most likely give up the investment property. While an investment property can be a good income source, most investors would rather keep a roof over their heads than pay for the mortgages and upkeep of another property.
It’s all about setting your priorities straight. Thus, lenders find primary residences a somewhat secure option compared to rental and other investment property types.
Between primary residences and investment properties, the latter is often a good idea, even if lenders charge higher rates for them.
What Affects the Mortgage Rate for Investment Property?
It is important to calculate your return on investment when comparing mortgage rates to decide if an investment property is worth pursuing. Generally, mortgage rates for investment properties are higher than mortgage rates for primary residences, and the difference can vary depending on your credit score and down payment.
A good credit history and a larger down payment will help you qualify for better mortgage rates on investment properties. It’s important to speak with a mortgage specialist to get an idea of mortgage rates for investment properties in your area, as the rates can vary significantly from one region to another.
Ultimately, it’s about balancing the mortgage rate against potential returns on investment to decide if the venture is worth taking on.
6 Key Factors That Affect Investment Property Mortgages
Let’s take a quick look at some of the factors that affect investment property mortgage rates:
1. Credit Score
Lenders nowadays don’t want a repeat of the last housing market crash. They now hold higher standards when it comes to an applicant’s credit score. The higher your credit score, the more likely you are to get the best mortgage rate for investment property.
2. Down Payment
Your monthly mortgage payments will depend largely on how big a down payment you can make on the investment property of your choice. The bigger the down payment, the smaller the monthly mortgage payment you need to make.
3. Debt-to-Income Ratio
Lenders also take a look at your ability to make monthly payments. For this reason, they factor in your debt-to-income ratio or DTI. Your DTI is basically just a summary of your monthly debt payments divided by your gross monthly income.
4. Loan-to-Value Ratio
The loan-to-value ratio, or LTV, is a metric used by lenders to compare the amount of your mortgage versus the appraised value of the investment property. And just like your monthly payments, the amount of your down payment will significantly impact your LTV.
5. Regional Rates
Mortgage rates are also affected by the different regional rates. As mentioned earlier, the rates vary from one area to another. That’s why it’s very important to perform due diligence so you can get the most optimal return on your investment, even if you must take out a loan to get it.
6. Inflation
We’re all quite aware of how inflation rates have gone up this past year. Because of that, the Federal Reserve has taken an aggressive stance to combat it by increasing interest rates to minimize consumer borrowing. Unfortunately, mortgage rates are also affected by these spikes, so you need to give plenty of thought before signing up for a mortgage.
4 Tips to Get the Best Mortgage Rate for Investment Property
If you want to get the best rates when you apply for a mortgage, you need to keep the following in mind:
1. Make a Bigger Down Payment
As we already discussed earlier, a bigger down payment gives you lower monthly payments on your mortgage. A huge chunk of the cost goes away when you make a down payment of at least 20% on an investment property.
2. Bring Your Credit Score Up
Your credit score will determine how much your interest rate will be. If lenders see that you have a stellar credit score, you are most likely going to be given the best mortgage rates on your property purchase.
3. Lower Your Existing Debt
If you lower your DTI, you are showing lenders that you have enough room in your budget to make the monthly mortgage payments and other costs associated with owning a property. They include expenses such as property taxes, homeowner’s insurance, and other property management costs.
4. Exhaust Your Options
A wise investor knows that he or she can save thousands of dollars over the life of a loan by shopping around for the best possible mortgage deals. It might seem like not that big of a deal, but many homeowners and investors spend way too much because they skip this part.
As a real estate investor, your goal is to make as much money as you can on a property, whether it’s through the rental income or the savings you make on your expenses. Think about it, a lower interest rate will significantly increase your gross rental income. So make sure to look for at least a handful of options before making a final decision.
How to Find a Profitable Investment Property in 2023
Now that you know how to find the best mortgage rate for investment property, the next thing you should know is how to find the most profitable investment properties in any location.
As we have already mentioned, you need to perform due diligence as a real estate investor. Aside from doing your research on the best possible mortgage deals, you also need to do your homework about the real estate market of your choice.
This is where investment property analysis comes into play. And while the conventional method may seem too much work and time-consuming, investing in real estate in a digital environment is a lot easier.
The Best Investment Property Platform
Real estate investing is made a lot easier today with real estate websites and online platforms. Mashvisor is one such platform with a high Trustpilot rating of 4.7 stars out of 5.
As an investment platform, Mashvisor helps investors find the right income properties for sale that can help them achieve their investment goals. Investors who subscribe to Mashvisor’s services are given access to the following tools:
- A large database of the US housing market that covers nearly all regions in the country
- A Property Search tool that lets them find investment properties in any location in the US
- A real estate heatmap that lets them customize their search according to their needs
- An investment property calculator that gives them accurate and realistic ROI projections using actual data from real estate comps
If you’re someone who’s looking to make a big investment in 2023, you will want to have a website like Mashvisor on your side.
Get started on your 7-day free trial with Mashvisor today, followed by a lifetime 15% discount.
Mashvisor’s real estate heatmap allows you to customize your investment property search according to your needs and preferences.
10 Best Locations for Investment Properties in 2023
Even if you’re able to get the best mortgage rate for investment property, you still need to look for the most profitable locations to ensure you get the most out of that loan.
We went over Mashvisor’s massive database to look for the ten best locations for an investment property in 2023. If you’re looking in the market for a rental property, you might want to check out the following cities and towns.
5 Best Places for Long Term Rental Investment Properties in 2023
According to Mashvisor’s December 2022 data, here are the five best locations for long term rental investment properties, arranged from those with the highest to the lowest cash on cash return.
The following list was filtered using the following criteria:
- Each market should have a median property price of no more than $1,000,000
- Each market should have at least 100 active long term rentals
- Each market should have a minimum of $2,000 in monthly rental income
- Each market should have a cash on cash return of 2.00% and above
- Each market should have a price to rent ratio score of 20 and higher
1. Vero Beach, FL
- Median Property Price: $734,654
- Average Price per Square Foot: $339
- Days on Market: 94
- Number of Long Term Rental Listings: 658
- Monthly Long Term Rental Income: $2,592
- Long Term Rental Cash on Cash Return: 4.30%
- Long Term Rental Cap Rate: 4.36%
- Price to Rent Ratio: 24
- Walk Score: 78
Search for and analyze long term rental properties for sale in Vero Beach, FL.
2. Fountain Hills, AZ
- Median Property Price: $868,372
- Average Price per Square Foot: $357
- Days on Market: 92
- Number of Long Term Rental Listings: 122
- Monthly Long Term Rental Income: $3,600
- Long Term Rental Cash on Cash Return: 4.16%
- Long Term Rental Cap Rate: 4.20%
- Price to Rent Ratio: 20
- Walk Score: 39
3. Naples, FL
- Median Property Price: $992,412
- Average Price per Square Foot: $529
- Days on Market: 88
- Number of Long Term Rental Listings: 1,660
- Monthly Long Term Rental Income: $3,986
- Long Term Rental Cash on Cash Return: 3.62%
- Long Term Rental Cap Rate: 3.66%
- Price to Rent Ratio: 21
- Walk Score: 29
4. North Miami, FL
- Median Property Price: $771,038
- Average Price per Square Foot: $421
- Days on Market: 60
- Number of Long Term Rental Listings: 269
- Monthly Long Term Rental Income: $3,155
- Long Term Rental Cash on Cash Return: 3.43%
- Long Term Rental Cap Rate: 3.47%
- Price to Rent Ratio: 20
- Walk Score: 52
5. Lantana, FL
- Median Property Price: $903,306
- Average Price per Square Foot: $439
- Days on Market: 69
- Number of Long Term Rental Listings: 112
- Monthly Long Term Rental Income: $2,672
- Long Term Rental Cash on Cash Return: 3.35%
- Long Term Rental Cap Rate: 3.41%
- Price to Rent Ratio: 28
- Walk Score: 65
Start looking for the most profitable investment properties for long term rentals in any area of your choice with Mashvisor today.
5 Best Places for Short Term Rentals in 2023
For those who are interested in starting a Vrbo or Airbnb business, you might want to consider the following locations. We used the following criteria to come up with the list below:
- Each market should have no more than $1,000,000 in median property price
- Each market should have a minimum of 100 active short term rentals
- Each market should have at least $2,000 in monthly rental income
- Each market should have a minimum of 2.00% cash on cash return
- Each market should have a 50% or higher short term rental occupancy rate
Mashvisor’s latest data tells us that the following locations are the top five markets to invest in a short term rental property, arranged from those with the highest to the lowest cash on cash return.
1. Harpers Ferry, WV
- Median Property Price: $399,075
- Average Price per Square Foot: $265
- Days on Market: 59
- Number of Vacation Rental Listings: 107
- Monthly Vacation Rental Income: $4,315
- Vacation Rental Cash on Cash Return: 7.77%
- Vacation Rental Cap Rate: 7.88%
- Vacation Rental Daily Rate: $220
- Vacation Rental Occupancy Rate: 57%
- Walk Score: 0
Search for a profitable short term rental property for sale in Harpers Ferry, WV.
2. Schiller Park, IL
- Median Property Price: $284,199
- Average Price per Square Foot: $221
- Days on Market: 29
- Number of Vacation Rental Listings: 132
- Monthly Vacation Rental Income: $3,643
- Vacation Rental Cash on Cash Return: 7.64%
- Vacation Rental Cap Rate: 7.79%
- Vacation Rental Daily Rate: $165
- Vacation Rental Occupancy Rate: 57%
- Walk Score: 71
3. Columbia Heights, MN
- Median Property Price: $255,662
- Average Price per Square Foot: $139
- Days on Market: 49
- Number of Vacation Rental Listings: 327
- Monthly Vacation Rental Income: $3,175
- Vacation Rental Cash on Cash Return: 7.52%
- Vacation Rental Cap Rate: 7.68%
- Vacation Rental Daily Rate: $158
- Vacation Rental Occupancy Rate: 57%
- Walk Score: 82
4. Harvey, LA
- Median Property Price: $252,088
- Average Price per Square Foot: $160
- Days on Market: 80
- Number of Vacation Rental Listings: 799
- Monthly Vacation Rental Income: $2,868
- Vacation Rental Cash on Cash Return: 7.37%
- Vacation Rental Cap Rate: 7.53%
- Vacation Rental Daily Rate: $181
- Vacation Rental Occupancy Rate: 57%
- Walk Score: 61
5. Northlake, IL
- Median Property Price: $321,543
- Average Price per Square Foot: $204
- Days on Market: 59
- Number of Vacation Rental Listings: 118
- Monthly Vacation Rental Income: $4,013
- Vacation Rental Cash on Cash Return: 7.29%
- Vacation Rental Cap Rate: 7.42%
- Vacation Rental Daily Rate: $168
- Vacation Rental Occupancy Rate: 54%
- Walk Score: 33
Go to Mashvisor now to start looking for and analyzing the most profitable investment properties for Airbnb, Vrbo, and other similar platforms in any location of your choice.
Wrapping It Up
Even with the high inflation rates we’re seeing now, it is still possible for you to find the best mortgage rate for investment property in any area of your choice. You simply need to do your homework. There’s nothing that can replace what due diligence can do for you.
As an investor, you must put in the work if you want to get the most out of your hard-earned money. Using Mashvisor is a good way of ensuring that you get more bang for your buck.
Mashvisor offers you access to the most accurate real estate market data, as well as the tools to make finding and analyzing real estate properties faster and easier.
Learn more about how Mashvisor can help you find the best deals in the most profitable markets by scheduling a demo now.