Is there a better way to purchase investment housing than a mortgage? How can people afford to do this?

I own the house I live in (a small part of it), a condo I rent out, and I'm looking to expand. I have excellent credit, money to make a 20% down payment, and I'm looking at buying a relatively cheap pre-forclosure house. I'm getting high monthly payments estimates from mortgage companies. I'd make next to no profits. How do people afford to buy and make money off of investment properties? Is there secret funding somewhere?

call us fsbo sellers and offer them a 5 year L2P contract. that gives you 5 years to rent it out and see where the market is heading. If it goes back up you can then purchase the house for the price you set right now. I do all my rentals this way so if a renter totally destroys the house i can just walk away with no liability back to the original owner with no money out of my pocket

You might want to look into a home equity line of credit on your condo. If you have a lot of equity in it, you can use it for collateral to buy something else. Also if you have good credit, you can sometimes get an unsecured line of credit from your bank.

A line of credit is useful because you only pay interest on the amount of money you actually use but you can qualify for more (i.e. the actual amount of equity you have). But beware: these lines of credit are often subject to short-term interest rates which are higher than longer term loans like mortgages, and the interest rates are variable. Thus, this may not be an answer to your cash flow dilemma.

Most mortgage companies charge a higher rate of interest for investment properties and often require 25% down (some may ask for less). This can cut into cash flow. You might also investigate if the property you want to purchase could be considered a "second home" so you could get a lower interest rate.

Another option would be to pay points to buy down your interest rate. This would in essence be paying interest up front. By doing this, you could improve your monthly cash flow.

I work at a mortgage company and can tell you that investment properties are one of the highest risk loans as a lender. Here's what factors into a loan.

1. LTV over 70% look for a 0.25% increase in rate.
2. Debt ratio over 50% Look for a 0.125% increase in rate.
3. And just for being an investment property will get you hit for 1.5 points. usually adjusted for by buying up the rate.

Heres a couple suggestions.

1. take a 30 YR fixed interest only mortgage it'll have a higher interest rate but a lower payment. That way if your renter leaves and your stuck with the payment at least its less. It'll also re-amortize so that if you do pay down principle then you will get a lower payment in return.

2. put 30% down it'll help you get a lower rate. and because you owe less money a lower payment as well.

3. If you really want to abuse the system get a home greater than 60 miles away from yours and then call it a second home. Second homes have better rates than investment properties.

4. Claim your buying a smaller home to reduce costs and say its going to be your primary residence. You may have to list your home for sale but just over state the price and decline any offers you may get. This way you can say that you will be moving in to the new home. This option is more risky and some lenders wont allow it. But if they do you'll be much better off having tricked the system. But dont get an ARM if you do this as once you have a lease the jig is up and any lender will know when you refi it that its an investment property.