Six Tips for Financing Investment Property

Investing in rental properties can be both profitable and worthwhile when done right. In today’s market, a rental property can provide a consistent cash flow now and serve as a valuable long-term investment down the road. 

However, deciding to take the leap and buy a rental property is just the beginning. Novice real estate investors may be surprised to learn that many mortgage programs they are familiar with are only available to borrowers looking to finance a primary residence.  

So, whether you are new to the investment property game, or you are a seasoned real estate investor, these six tips for financing investment properties are beneficial to review. 

1. Consider Putting Down a Hefty Down Payment 

The whole point of purchasing a rental property is to make money. Therefore, your down payment is an essential factor in determining how much profit you will generate each month. Plus, the more money you put down, the less you’ll end up paying over the life of the loan. Keep in mind that income, credit score, and other variables all come into play when a lender determines your specific down payment requirements. Most traditional financing lenders require you to put at least 20 percent down for investment properties.

2. Research Your Banking Options

Don’t limit your search for lending institutions to just the big commercial banks. Local, smaller banks tend to be more flexible with their requirements and are willing to invest. Once you purchase your property, consider hiring an experienced, local property management company to oversee and protect your investment.                

3. Explore Owner Financing

If your credit score is not as strong as you’d like, owner financing might be a viable option that will work for your situation. In this arrangement, the investor makes their monthly mortgage payments directly to the seller instead of borrowing money from a bank.     

4. Tap into Your Current Home’s Equity

Using your home’s equity to help secure financing for your rental property has pros and cons depending on your needs and the kind of loan you pick. You can get an interest-only loan with a variable rate, or you could choose a cash-out refinance that comes with a fixed rate. However, that option might very well extend the time left on your existing mortgage. 

5. Get Creative

Traditional financing is not always available (or the best option) for every rental property investor. Creative ways to get the money you need for purchasing can include utilizing credit cards and tapping into life insurance policies. 

6. Do What You Can to be a Strong Borrower

Improving how you appear on paper to prospective lenders can help you get the loan and rates you want. Work on improving your credit score, make sure you have your employment and income documentation available, and pay down your other debts if possible.   

As you can see, there are many ways you can choose to finance your investment properties. Understanding the different financing options available will help you make the best decision based on your circumstances. It’s ok to explore alternatives to traditional financing but be sure that you can afford your payments so you don’t take on more than you can handle. 

Source link