April 15, 2024

Illuzzi Letter

Envisioning And Creating Your Dream Home

Buying Investment Property – “A Foolproof Plan”?

You’ve done it!

Home prices in your local real estate market are their most affordable level in a decade and interest rates are their lowest ever.

It looks like the stars are finally in alignment and it’s the right time to buy that investment property you’ve been considering for months.

As you formulate your “foolproof plan”, research tells you that the combination of low prices and interest rates will give you a positive cash flow and a return on investment far greater than anything a bank might be offering. The demand for rental units in most markets is up because of the huge number of displaced homeowners.

But you’re wondering how you might make it even more lucrative.

You’ve checked every lender website on the internet and found that the interest rate for a mortgage on an investment property is higher than it would be if it was owner occupied.

The “foolproof plan” begins to take shape.

“If tell my lender that I’m going to live in the property that would give me a lower interest rate and I wouldn’t have to make that 20{bc1e42e53d8565163e9cec719c82f5e0892e054fb5d628f08363879e07731a2f} down payment, which means I might be able to buy a second investment property with the money I saved”.

You discussed this “foolproof plan” with your neighbor and brother-in-law, who said “no problem” “We know lots of people who did that, and never got caught”

Foolproof plan?

A plan like this is not a “foolproof” plan, in fact it’s more like a scheme or scam.

The execution of this plan is a violation of federal law and that means a fine AND jail time, This is occupancy fraud, pure and simple. Any idea, who investigates mortgage fraud? It’s the FBI and I’ve heard they’re really good at what they do.

Despite everything that has happened and is happening in the real estate market, this is “foolproof plan” continues to play out daily, and lenders know that some people are still trying to buy a home this way. Lenders may have done some dumb things in the past, but we’re not dumb enough to continue doing them as the number of foreclosures continue to climb because we “turned a blind eye” to these schemes in the past.

In today’s market these “foolproof plans” will never withstand the scrutiny lenders are now giving every loan file. They will examine everything from the size of the new house as it compares to your current residence, the increase in commuting time, the motivation of the buyer etc.

If the buyer already owns rental property, chances have now dropped to ZERO this attempt will be successful.

Does that mean there aren’t legitimate reasons to buy another home as owner occupied and keep your current home as a rental? By no means, but that’s a discussion for another time and it won’t involve committing a felony.