For the most part, it’s a great time to be a real estate investor: interest rates are low, and home values are climbing in most areas. In fact, metro areas like DC are growing rapidly, which means there’s a good chance you’ll get high returns from your investment.
But, if you’re trying to start investing in rental properties, or a current landlord looking to expand his properties, the first thing you’ll have to do is figure out a way to finance your purchase. The credit market is tight, but with a little preparation, you should have no problem getting an investment property loan.
Read on to discover a few tips you can use to make sure you get the loans you need.
1. Have a Good Credit Score
You want to present yourself as a strong borrower, so check on your credit score before applying for investment property loans. Your credit score will determine how favorable the loan’s terms are for you; anything below a 740 will probably require you to pay a fee to keep the most favorable interest rates.
Additionally, many lenders also require you to have sufficient reserves in the bank to pay for all your expenses for a minimum of six months before the lending negotiations can begin.
2. The Down Payment
Make a hefty down payment - at least 20% of the property’s cost down to receive traditional financing. If you want a better interest rate, you’ll probably have to put down 25%. Your mortgage insurance doesn’t cover investment properties, so if you can’t obtain the down payment, you may be able to file a second mortgage on the property. Be prepared to fight hard for it though, because it will be a struggle.
3. Try the Smaller Banks
If you’re having trouble securing a big enough down payment, try applying for a loan at a local bank. These banks typically have a little more flexibility with their terms, and they may be more interested in facilitating local investments.
A mortgage broker is another option to consider. They often offer a wider range of loan products than many banks, but be sure to do your research before you choose one.
4. Consider "Out-of-the Box" Strategies
Try owner financing. Because of the tightening of credit in today's market, it’s more acceptable than a few years ago. You will need a plan that will persuade the seller to go with owner financing.
If the potential for rental property income is high you might consider using a home equity line of credit, or even credit cards to secure a down payment or funds for renovation.
Buying an investment property can set your portfolio up for success and allow you to claim rental property deductions not available to non-landlords. Be smart, and have all your bases covered before you apply for a loan; the better your financial situation is before you begin the process, the quicker you’ll be able to become the landlord you’ve always wanted to be. The expertise of an accountant might be the next step to take your business to the next level.
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