Investment property financing can be an intimidating task for any real estate investor.
Obtaining a loan for your investment property is a challenging endeavor, and the number of options available to you might make it hard to decide on the best loan for your specific investment strategy.
This blog aims to provide you with a few tips that might help you get started on planning your investment property financing, and as you gain more experience, you will be more capable of planning your finances and acquiring the best loans for your real estate investments.
Investment Property Financing: General Tips
When looking for options for investment property financing, there are a couple of tips that can help you acquire a loan more easily and more efficiently.
Save for a Sizeable Down Payment
Although the main reason for applying for a loan for your investment property is to acquire debt money that you don’t have in cash, you should always keep in mind that saving as much money as you can for your down payment will give you an advantage for your investment. This is because most money lenders will require you to have a minimum down payment of 20% of the investment property’s value, and this value can go up to 30% in some cases.
Related: Why you shouldn’t put less than 20% down payment
So, having enough money for a 25% down payment, for example, would increase your chances of securing a loan for your investment property, in addition to reducing the amount of interest that you will have to pay on your loan.
Check Your Credit Score
When considering your options for investment property financing, and before applying for a loan, make sure to check your credit score, as most lenders will require you to have a certain credit score in order to qualify for the loan (generally you will want a credit score of 740 or higher). Your credit score is determined by your annual income and by having a verified and secured source of income. Having a credit score that is below the 740 mark will most likely result in a higher interest rate on your loan, which will affect the profitability of your investment property.
Don’t Resort to Big Banks
When it comes to lending money from banks, consider your local options, or the local banks in the area that you’re trying to invest in. In most cases, it will be easier for you to acquire a loan through a smaller bank, and the bank will have a better insight into the local area that you’re investing in, which will help it determine whether your investment has a high chance of succeeding or not.
Investment Property Financing: Rental Properties
If you’re looking for investment property financing for a rental property, then you might want to consider conventional bank loans. Conventional bank loans are the most common type of loans, especially for financing rental properties, for a number of reasons.
While the typical expected down payment on a conventional bank loan for a home purchase is 20%, this rate can go up to 30% for investment property financing. A conventional mortgage conforms to the guidelines set by Fannie Mae and Freddie Mac, and it is not backed by the federal government. Additionally, for conventional mortgage loans, it is generally acceptable to pay your down payment through gifted funds. However, make sure that the gifted funds are properly documented to be accepted for the loan.
Related: Financing a Rental Property: What’s the Best Way?
Investment property financing through a conventional mortgage will rely solely on your credit score and credit history, and this will be the main factor affecting your loan acceptance and the interest rate that will apply to your mortgage.
The lender will also review your assets, and you must be able to afford any existing mortgage that you might have as well as any loan payments on your investment property. In addition, the future rental income on your property will not be factored into the debt-to-income calculations, and you will typically be required to have a minimum of six months of reserve cash to ensure that you will be able to cover your mortgage obligations.
Investment Property Financing: Fix-and-Flips
If you’re not looking for investment property financing for a rental property, and are instead more interested in a fix-and-flip investment, then a fix-and-flip loan will be a better option for you. A fix-and-flip loan is a short-term loan that will allow you to purchase the house and pay the costs of renovating the property in order to place it back on the market as soon as possible.
Fix-and-flip loans are usually hard money loans, and although the lender will still check your credit score and credit history, the main factor affecting your qualification for the loan will be the expected profitability of your investment property. This makes it easier to acquire a loan for your investment property if you’re certain that your investment will be successful and you are able to prove it regardless of your current financial situation and income. Usually, the after-renovation value of the investment property is used to determine your ability to pay back the loan.
Related: Considering a Fix & Flip? Ask Yourself These 3 Questions First
One of the advantages of fix-and-flip loans is that they can be obtained in a shorter amount of time; a fix-and-flip loan might be obtained within days to weeks in comparison to the months that may be required to obtain a traditional loan.
However, fix-and-flip loans have a downside to them in regards to interest rates; a typical fix-and-flip loan’s interest rate might go as high as 15-18% of the loan’s value, which is a very high interest rate in comparison to other types of loans, and the time that you will be required to pay back the loan will also be shorter, sometimes being less than a year.
Bottom Line
Although this list is by no means comprehensive, when it comes to investment property financing, there are numerous options that will be available for your consideration, and you will need to do extensive research in order to determine the best type of loan for your investment.
Make sure to use Mashvisor when planning your real estate investment, as it will give you access to a number of searching and analytical tools that will help you plan around your investment and come up with the best strategy to suit your investment purposes.