In today’s financial climate, many investors are exploring the real estate market and considering it a welcome addition to their portfolios. Investment properties can provide a steady, reliable source of income as well as lucrative returns. Most people, however, don’t have enough cash on hand to purchase these rental properties outright. In this article, we will explore five tips to keep in mind when financing your investment properties.
- Plan on Making a Significant Down Payment – Mortgage insurance does not cover investment or rental properties, so you will usually need to put down at least 20 percent if you plan on getting traditional financing from a lender. If you are apt to consider an even heftier down payment, it could help you qualify for the best interest rates.
- Look for Creative Options – You’ve found the perfect investment property, but perhaps traditional financing options may not yet be available to you in your current situation. If this is the case, there are creative options out there you can use to finance your investment property (or to get the funds you need for your down payment). Credit cards, home equity lines of credit, and even life insurance policies can all help you get the cash you need to appear more attractive to lenders.
- Consider Owner Financing – Since stellar credit scores are not as easy to come by as they used to be, and lending terms are increasingly strict, owner financing is becoming an acceptable alternative to traditional funding for investment properties. In this type of financing, the seller accepts your down payment; then, they extend credit to you for the rest of the purchase price. If you decide to explore this route, make sure to have a good game plan in place before approaching the seller – they need to be sold on accepting both owner financing and you.
- Check Your Credit Score and Put Some Extra Money Away – Having a good credit score is helpful in all types of financing situations, and investment properties are no exception. Therefore, you will want to check your credit score before trying to secure the financing of an investment property. If your credit score is under 740, you will be required to pay additional fees (or points) to get the interest rate you want.
Additionally, make sure you have some extra money put aside in the bank. When making a loan decision, lenders will look to see if you have at least six months of reserves to pay not only for investment properties but for your personal expenses as well. Showing that you have a good debt-to-income ratio helps ensure to the lender that you will be okay should you encounter any rental vacancies. Hiring a rental property management company can help you fill these vacancies should they occur.
- Try Different Banks – If you have extenuating circumstances, or if you have a small down payment for your rental property, try going to a local bank instead of a large financial institution. Typically, these smaller ‘neighborhood’ banks have more flexibility, understand the surrounding area well, and they also are more prone to invest locally.
Now, first things first, it’s time to find that perfect investment property. Get started today and use these tips to help guide you through the process.
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