One important aspect for investing in real estate is how you will finance your rental properties. Of course, everyone would like to pay cash all the time, but we all know that is not possible. If you’re ready to borrow money for a residential investment property, here are some tips that can help improve your chances of success.
1. Make a Larger Down Payment
When it comes to investment property loans, you will generally need to put a larger down payment than for your primary residence. This amount is usually at least 20 percent. However, if you put down 25 percent or more, you may qualify for a better interest rate. This is because a larger down payment gives the lender less risk in the loan. That can be a powerful incentive for your lender to offer a better rate and lower financing costs. However, keep in mind that if your investment goes poorly, you’ll lose your whole stake before the bank begins to lose any money in the property.
2. Have a Strong Lending Profile
Although there are many factors when it comes to loan approval, the two largest ones are your debt-to-income ratio and your credit score. Having a debt to income ratio lower than 35% gets you much more favorable terms. However, some lenders will still give you a loan with up to a 50% debt to income ratio. When it comes to credit scores, lenders prefer to see a score of at least 740 when it comes to investment property loans. One other item that investment property lenders look for is having a strong cash reserve. This means that you should have some money in the bank to cover any unexpected costs in case the investment goes south.
3. Go With A Local Broker or Bank
While there are many online lenders in this day and age, we always recommend you turn to a local lender or bank. There are a few reasons why this could be beneficial to you. The first is that with this option, your lender will be much easier to contact. Oftentimes, you will have direct access to your local mortgage representative. This means they are just one call/text/email away. Imaging having to dial a 1-800 number any time you wanted any of your loan questions answered! The second reason is the relationship you can create for the future. Once you have one or two successful rental properties financed by the local lender, the chances of them approving more loans is greatly increased. This is especially important if you are looking to build a vast portfolio of properties. With most local lenders and banks offering the same rates and programs as the big national/online lenders, there is really no reason to go outside of your own backyard when it comes to getting a loan for your properties.
4. Try to Get Owner Financing
Depending on the market conditions and overall circumstances of a home seller, you may be able to obtain owner financing. This would mean that the current owner of the home would essentially become the bank. You would be responsible for giving them a down payment and paying them monthly as you would with a traditional mortgage. The benefit to the home seller is that they are earning an interest rate on the money they financed to you. Oftentimes, this is a higher percentage than they would get from their bank if they were to put the money in their savings account or CD. WIth owner financing, you do not have to worry about dealing with banks and lenders. Instead, you are dealing with an individual.
5. Use Your Primary Home’s Equity
If you have a sizeable amount of equity in your primary residence or other investment properties, you can actually use it as a form of financing. There are a few ways you can do this.
Home equity loan
One option for this method would be a home equity loan. These loans are secured by the equity in your home. This allows the interest rates to be relatively low, and the repayment terms are rather flexible. If you have good credit, interest rates can be even lower.
HELOC
A home equity line of credit (HELOC) is another way to use your home’s equity to fund an investment property. These loans are also secured by your home’s equity. However, in this case, you draw the funds as needed instead of a lump sum. HELOCs can have interest rates lower than home equity loans, but the interest rates are usually variable. For this reason, you could find yourself paying a higher interest rate in the future.
6. Use a Hard Money Loan
Hard money loans are made by what are known as “asset based lenders”. These are organizations, or private individuals, who are more concerned about the asset you are purchasing rather than your personal financial information and history. These types of loans usually have higher interest rates(typically in the range of 10 to 15 percent), and higher financing fees. Nevertheless, hard money loans can be a good option for individuals who are looking to buy property quickly and in high volume.
It is important that however you finance a property, you must make sure you can afford the payments when you take out the loan. As you pay the loan over time, think about how you might be able to reduce costs and expenses even further. If you would like some additional advice on how to finance investment properties easily, please reach out to our team today and we would be happy to help!