When finding the right investment properties there are a lot of factors to keep in mind and probably the first and most important is your financing plan. Financing for investment properties is rarely as straightforward as we’d like it to be. There are always a few wrinkles to be ironed out. But if you’re considering the purchase of property, sort through your various options and be sure to include the following.
Online Lender
Plenty of real estate investors continue to use local banks and credit unions when it comes to financing for investment properties, but those are no longer the only options. Some experts even argue they’re no longer the easiest ones. Different lenders have different programs and a bank may reject you but an online mortgage broker might have a program that works for your situation, so check around. Loan costs and rates will also vary, so get a couple of estimates and compare them to find the best deal.
A Large Down Payment
There are a lot of problems you can face with financing for investment properties, like getting a mortgage. If you’re having a hard time getting qualified for a mortgage then you should probably consider holding off for a few months and save some extra cash. If you can put a 25 percent down payment or more, you can save considerably on the interest. If you can furnish more than 50 percent, you might even be able to attract a hard money lender on far more favorable terms. It might take extra time and may require more waiting, but in the end, if you can put down a large down payment you can save yourself a lot of trouble when financing for investment properties.
Seller Financing
Seller financing is another option that often works when a real estate investor can’t get a loan from a bank or other traditional lending sources. In this case, the seller of the property, which is almost always owned free and clear, essentially becomes the bank. You take ownership of the property, but then cut monthly mortgage payments to the previous owner. Should you default, the seller has recourse to take the property back. If you try to pursue seller financing, you have to get together a smart game plan. Approaching a seller without any details isn’t going to inspire his or her confidence. You need to have specific terms written out and ready to be executed because financing for investment properties is not an easy job.
Think Outside the Box
Financing for investment properties can be creative in one way or another. Try thinking outside the box. If you’re looking at a good investment property with a high chance of profit, consider securing a down payment or renovation money through a home equity line of credit, from credit cards or even via some life insurance policies. Financing for the actual purchase of the property might be possible through private, personal loans from peer-to-peer lending sites which connect real estate investors with individual lenders. Just be aware that you may be met with some skepticism, especially if you don’t have a long history of successful real estate investments. Some peer-to-peer groups also require that your credit history meet certain criteria. When you’re borrowing from a person as opposed to an entity, that person is generally going to be more conservative and more protective of giving their money to a stranger.
Find a Business Partner
They say two hands are always better than one. When financing for investment properties you might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with. You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment. You also need to consider how you will hold the investment property.
Don’t Forget to Check Your Credit Score
Before making any decisions about financing for investment properties, you need to analyze your credit score. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report. Look to find any errors on your credit report. You should closely look at your credit report to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors:
- credit information from an ex-spouse
- credit information from someone with a similar name, address, Social Security Number, etc.
- incorrect payment status like stating you are late when you aren’t
- a delinquent account reported more than once
- old information that should have fallen off your credit report
- an account inaccurately identified as closed by the lender
- failure to note when felonies have been remedied
At the end of the day, keep in mind that financing investment properties is not a smooth walk in the park but rather requires a lot of attention. Whichever route you choose to follow, it will all be worthwhile in the end when you own your very own investment property. Be sure to check out Mashvisor for all the latest tips and strategies for financing investment properties and much more.