5 Tips for Financing Your Real Estate Investment Property
Interested in investing in real estate? If you have so much as dipped your toes into this world, you know that there are a lot of moving parts with which to contend. From location selection and property analyses to negotiations and contracts, the list of factors to consider is long. As you move forward with the process, though, you also know the three most critical aspects are financing, financing, and financing!
Let’s take a look at five top tips for financing your real investment property:
- Make sure your credit is in order. How’s your credit looking these days? You know potential lenders are going to look, so you need to take a peek yourself. The goal in securing a loan is to get the most favorable terms possible – and that means a good interest rate.
If your credit score is below 740, your lenders will try to mitigate their risk by offering a loan with higher interest rate. Alternatively, they may impose a fee to keep the interest rate low. This can be between ¼ of a point to two points.
Lenders also want to see cash reserves for any properties you already own. These should be equivalent to six months worth of expenses (both personal and investment).
If there are items on your credit report that can be relatively easily resolved, do so. A boost in this number will have a significant impact on your long-term finances. And if you can build up some cash reserves, that’s another key step to take before you shop lenders.
- Think local. When it comes to choosing a lender, it may be a good idea to look beyond national banking and financial institutions. While they certainly have the deep pockets required to fund your project, they can be exceedingly rigid as far as your loan terms go. Local lenders (e.g. neighborhood and community banks) are often more willing to invest in their own backyard.
- Get pre-approved for financing. After you check your credit and try to repair any negative items, visit a trusted bank, mortgage broker, or other lender for pre-approval. This should be in writing so when you begin the negotiation process for a property, you can assure the seller that you’re ready to go and the deal won’t get bogged down or stopped completely because of financing qualification issues.
- Down payment: the bigger the better. Making a larger down payment reduces the amount you must borrow, and you’ll see savings when it comes to paying interest over the long haul. But a big down payment is important for another reason.
Investment properties are not covered by mortgage insurance, which compensates lenders in the event of a default. You need to put down at least 20 percent if you obtain a traditional mortgage. But if you bump it up to 25 percent or more, you may be able to get a better interest rate.
- Pull the trigger. When you’ve done your homework, when you’ve delved into the details, when you’ve crossed every t and dotted every i, it’s time to go ahead with the deal. Often, investors – particularly first-timers – are hesitant. Make the leap and commit.
It is far easier to commit when you’re confident in the property in which you are investing. Contact our team to learn more about investing in turnkey properties. We can help you put these tips into action and realize the return you need.