Investment property financing works differently from the funding of primary homes. Here are five tips on how you can prepare to finance your next or first investment property.
1. Put Together a Strong Down Payment
With an investment property, it’s worth it to put together a strong down payment so you can obtain financing. While you can get a mortgage for your primary house with a low-down payment, lenders like to see at least 20 percent down with investment property. Delay your purchase so you can save up or look at a property with a lower price tag if 20 percent seems like a stretch.
2. Check Your Credit Score Before You Ask to Borrow
Lenders reward those with high credit scores with favorable interest rates. They penalize those with moderate credit scores with higher interest rates (or require them to buy points to keep a more favorable price) and may refuse to extend money to those with poor credit. Once you know you want to invest in property, check your credit score. If it’s only okay, do what you can to raise it now so you can borrow at a better rate.
3. Try Owner Financing
Since lending regulations have tightened, owner financing has become more common. While banks would have once balked at this arrangement, now it can work if you sell the seller on the concept. In owner financing, the seller essentially acts as a bank would. Rather than paying a monthly mortgage, you would pay the seller.
Sellers may go for this arrangement if they don’t need the money from selling the property in one lump sum, or if your offer is enticing. Thus, you might allow the seller to retain the title to the property until you have paid in full. This is a good option if you are unable or unwilling to qualify for a traditional bank loan.
4. Consider Different Types of Loans
Think creatively, and you will realize there are many ways you can obtain money to use for a down payment. So not only do you have a choice of lenders—for instance, local banks versus large national banks—you have a choice of loan types.
HELOCs, or home equity lines of credit, are an option if you own a home and have built up enough equity to withdraw. Personal loans are another option, and peer-to-peer lending sites can also help you obtain the money you need. No matter how you come up with the money, once the property is rented out, you can use this income to start paying off your loan.
5. Try Local Banks
A local bank might be a smarter bet than a national bank for financing your rental property. Local bankers usually have an interest in supporting the community, and they will know the market better than a major bank with a limited presence in the area. This benefits you because the banker can be more flexible when structuring the deal.
Be patient and persistent. With time, effort, and creativity, you will be able to find the financing you need to move forward with your investment property. And if you need a little help getting started, hire a property manager to handle the financing details for you.