Purchase of investment properties – "a foolproof plan"?
You’ve done it!
Home prices in your local housing market are at their most affordable in a decade and interest rates are at their lowest.
It looks like the stars are finally aligned and the time is right 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 return on investment far greater than anything a bank can offer. Demand for rental units in most markets has increased due to the large number of displaced homeowners.
But you are wondering how you could make it even more lucrative.
You’ve checked every lender website on the Internet and discovered that the interest rate on a mortgage on an investment property is higher than it would be if it were owner-occupied.
The “infallible plan” begins to take shape.
“If I tell my lender 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% down payment, which means I could buy a second investment property with the money that I saved”.
He discussed this “foolproof plan” with his neighbor and brother-in-law, who said “no problem.” “We know a lot of people who did that and never got caught.”
Foolproof plan?
A plan like this is not a “foolproof” plan, in fact it is more like a scheme or a scam.
Execution of this plan is a violation of federal law and that means a fine AND jail time. This is occupation fraud, pure and simple. Any ideas, who investigates mortgage fraud? It’s the FBI and I’ve heard they’re very good at what they do.
Despite all that has happened and is happening in the real estate market, this “foolproof plan” continues to work on a daily basis, 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 keep doing them as the number of foreclosures continues to rise because we “turned a blind eye” to these schemes in the past.
In today’s market, these “foolproof plans” will never stand up to the scrutiny that lenders are giving to every loan file. They will look at everything from the size of the new home compared to your current residence, the increase in travel time, buyer motivation, etc.
If the buyer already owns a rental property, the chances are now down to ZERO this attempt will be successful.
Does that mean there are no legitimate reasons to buy another owner-occupied home and keep your current home as a rental? No way, but that’s a discussion for another time and it won’t involve committing a felony.