Five Tips for Financing Investment Property

Financing Investment Property

Investment Property Financing

With home prices on the rise, now is a great time to get into real estate investment. For some investors, coming up with the capital to purchase a property is holding them back, and financing becomes the only way to get into the game without having to wait a decade to save up the cash. Once you’ve found the property that’s right for you and your portfolio, here are a few tips for financing your investment.

1. Start with Your Situation

Financing terms are always more favorable for reliable borrowers than those who have weak credit or are attempting to finance what may seem to be a risky property. A general rule of thumb is to build your credit score to at least 740 before applying for a loan. That score or anything higher signals lenders that you are diligent with your bills and, therefore, less of a risk. Borrowers with lower scores may have to pay higher interest rates, additional fees, and jump through more hoops to secure financing or to ensure a reasonable interest rate.

Another factor banks will consider is the amount of cash reserves you have access to—not including any cash intended to be used for a down payment, making improvements to the property, or otherwise being used to directly finance your venture. What lenders want to see is a reserve of cash that can be tapped to make loan payments and cover your own living expenses in the event of vacancies in your properties. If you do not have enough renters, you will also not have enough monthly income, and lenders will want their payments regardless of the status of your rent rolls. This can be especially true for investors who are juggling multiple properties.

2. Next: The Down Payment

You may not want to take the time to save up the cash to pay for the property in full, but coming up with a considerable down payment will put you in range of a traditional mortgage from a lender. The reason for the sizeable down payment is that mortgage insurance will not cover investment properties in most cases, and your lender will require some form of security in the early days of the repayment period when the lender is carrying the most risk.

Most lenders require at least 20 percent of the property’s cost to secure a mortgage, but 25 percent can help you qualify for a better interest rate—saving you lots of cash in the long run. By not having to pay as much interest over time, you’ll reach a profitable stage far more quickly. Investors should use caution when choosing this route, and it’s critical to do your due diligence before getting a mortgage as you’ll face losing your entire down payment if you’re unable to make the payments due to an unprofitable venture. It can help to have an extra reserve of cash for making bank payments for several months after closing the mortgage.

3. Think Locally

If national banks and major lenders are unwilling to finance your investment property or you are unable to get terms that are favorable enough for your situation, try local banks and brokers. Local institutions tend to be a part of the community and more willing to consider individual circumstances rather than standing by rigid requirements for lending. Some local institutions may also have programs for people who are interested in investing locally as this type of improvement benefits the entire community.

Local brokers are another great option as they will have access to a variety of lenders and loan products while also having ties to the local community. Choosing a broker is an important decision, so be sure to do your research before settling on a broker for your investment property.

4. Owner Financing

Owner financing is not a very common option, but as credit becomes more difficult to obtain and borrower standards increase, the number of these types of arrangements becomes more frequent. When going this route, you will be making payments directly to the current owner until you’ve paid for the entire property, or more commonly, until you’ve paid enough to secure a more traditional loan. In the second case, the owner would transfer the payments you’ve made (less fees, interest, or other agreed-upon compensation) to the lender as a down payment.

This arrangement is not always appealing to property owners as most are looking to wash their hands entirely of a building and would rather not be tied up for several more years. For that reason, buyers will have to do the work to make an enticing offer to the owner. This includes proposing the terms, working with a lawyer to create a contract (and expecting the owner to have that reviewed by their legal team), and do a bit of selling on yourself and the financing arrangement.

5. When All Else Fails

For those who are unable to secure other financing, a personal loan from a private individual rather than a financial institution may be possible. In essence, you’ll be asking that person to invest in you, much like you are investing in a property. Expect fairly conservative standards, but if you can show a high likelihood of profitability, you may be able to sway someone who may otherwise find investing in you too risky.

Protect Your Interests

All investors should remember that the purpose of any venture is to turn a profit. For those who are new to real estate investing and rental properties, using an experienced property management firm can be the secret to long-term success. From marketing expertise to keeping vacancies to a minimum, a full-service property management company will help bring your venture from simple profitability to long-term success.

About Sashi 107 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.

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