8 Tips for Financing an Investment Property
Real estate is potentially one of the most lucrative investments you can own. It brings the opportunity for steady income while you own it, and also tends grows in value, meaning you can likely sell it for a profit. This one-two combination makes real estate perhaps the most desirable form of investment.
But there are some issues with real estate investing. The biggest issue is total cost. With a 401(k), stock portfolio, mutual fund, and other traditional investments, you can start with just a few hundred dollars. (Or less!)
With a real estate investment, you likely need at least a hundred thousand dollars (often more!) to make the purchase. This means most people will be financing an investment property.
But mortgage loans for investment real estate, while similar in some respects, are different than financing for owner-occupied homes.
To successfully finance an investment property, you need the right information. It also helps to have a few tips from one of the top lending agents in San Diego…
Financing an Investment Property: Simple Tips for the Best Results
1. Get Involved with a Lending Agent BEFORE Looking for Properties
With investment properties, you need to move quickly. You can’t wait until you find a property to contact a lending agent; you need to make contact with one right away so you can quickly move into the process of the loan application.
Once you decide to finance an investment property, talk with a lending agent to learn about downpayment, documentations, and other important requirements.
2. Maintain a Strong Credit Score
Many factors will influence your interest rate, but few will have such a profound impact on the rate, as well as your chances of approval, as your credit score. If you are not familiar with your score, it’s best to check your credit before applying for an investment-property loan.
If you have a high credit score, you can move forward with confidence. However, if your score is low, it may be best to wait on a property purchase while making improvements to your credit. Steady payments and a manageable debt load will help improve your score and make you a stronger candidate for financing an investment property.
3. Look for Low-Cost, High-Value Properties
No matter how you buy an investment property, whether it is purchased entirely with cash or financed with a loan, you need to find a good value. With financing for investment properties, however, it’s probably best to find a low-cost house.
By “low-cost,” we certainly don’t mean run down, dilapidated, or even cheap, we simply mean a quality home that is in the lower half of the market (but not at the very bottom); one that you can rent out at a fair price, sits in a quality neighborhood, and has a decent size.
With moderate-priced housing, you will be able to rent the property for a profit without charging an amount that will push away most tenant. You’ll have a better chance of maintaining occupancy, meaning rent checks are more likely to come in at a regular basis.
4. Consider Foreclosures or Properties Nearing Foreclosure
Foreclosures can bring a strong income to your investment portfolio, but you need to be cautious and wary of run-down properties. The advantage of a foreclosure is price; if the bank has seized the home they are likely willing to sell it for a lower price than its highest potential value.
The downside, however, is that you may be purchasing a home that needs lots of revisions and updates. Foreclosures have a reputation (somewhat exaggerated) for being worn out and neglected, but if you can find one with “good bones” (to use a real estate cliche), you can fix it up and sell it for a profit or rent it out as an income-generating property.
5. Organize Your Income and Employment Information
Your income is obviously a major component for your mortgage application, so it makes sense that you’ll want to have all your information properly organized when you visit a lender. This should include bank statements, pay stubs, tax returns, stock statements, and any other information that pertains to your income. With this data, a lender will be able to move through the application quickly, so start early and keep everything organized.
6. Reduce Your Existing Debt Load
The all-important debt-to-income ratio! It’s considered in virtually every loan application that involves real estate, and it remains just as important for financing an investment property. Keep your debt to a manageable level and you are less likely (statistically speaking) to default on a mortgage loan. Therefore, having a debt-to-income ratio that sits around 20% to 30% (before the new loan) is a wise strategy that will increase your chances of approval.
7. Verify Potential Cash Flow from the Target Property
The potential income you generate from a property could make a big difference in the loan application. With a market study, conducted by a local expert, you will know roughly how much you will earn from the property, which tells the lender whether or not you will earn a profit on the investment. Obviously the greater this number, the better your chance of loan approval.
8. Bring a Sizable Downpayment
Yes, we just discussed loans as a solution to the high entry costs of investment properties. That said, you should still bring a significant downpayment when purchasing a property as an investment. In many cases, mortgage insurance is not available on investment properties, so you may need to bring 15 to 20% of the purchase price as a downpayment. Generally, the more you can bring as a downpayment, the lower your interest rate will be, which means a more affordable investment loan in the long run.
A large downpayment may be scary, but it gives you greater incentive to maintain a high-quality property, and it will significantly reduce (statistically speaking) the chances of foreclosure.
Reliable Service for Investment Property Loans
If you are ready to finance an investment property, contact our team right away. You’ll get clear advice and outstanding service from one of San Diego’s most experienced lending agents.