As real estate investment is still one of the best ways to generate wealth and financial stability, understanding how to finance an investment property is as important as setting your real estate investment goals and strategies. Therefore, here are some real estate investment tips on financing an investment property.
What many people do not understand is that lacking the financing does not mean you can’t get started in real estate investing. And it does not require that you have a lot of money as many may think. There are different ways available to fund your real estate investment business. Understanding each method and choosing the right one can be your way to success. Choose your ideal financing method depending on what property you are planning to invest in and which financial option fulfills your business goals and strategies.
Related: Do Not Let Rental Property Financing Discourage You From Becoming a Real Estate Investor
Here are some real estate investment tips on financing your investment property:
Real estate investment tips: Make sure you do not have any debts
If you are just starting in the real estate investing business, you should make sure that you pay all your debts. Whether it is student loans or medical bills, you have to make sure they are all paid in order for you to start clean. Check out your DTI, which is the debt-to-income ratio. You calculate it by dividing your periodic debt each month by your gross monthly income. The result of your current DTI is how you and the bank can evaluate whether you can survive the monthly payments. If your DTI is high in terms of your income, it might be a bad indicator that your debts are just too much to manage. In this case, the bank will probably refuse to fund the purchase of your investment property. The lowest DTI percentage to obtain a mortgage is 43 percent, and the lower the better.
Real estate investment tips: Save up for a good down payment
Yes, the down payment is a big deal. You should consider that financing an investment property requires a larger down payment than financing a personal property. A down payment for an investment property should be at least 20 percent compared with 3 percent for a property you are planning to live in. So, if you are saving up for a traditional loan, make sure you have enough to pay the down payment. Moreover, you should keep in mind that a good down payment will save you a lot on the interest rate.
Related: How Can You Be Buying Rental Property With No Money Down?
Real estate investment tips: A fixed rate mortgage is the best deal
When you turn to the bank for a loan, you will have different options for financing your investment property. You will have the choice of what type of mortgage you want to take. Is a traditional fixed rate mortgage a good idea for you? Or is an adjustable rate mortgage (ARM) a better choice?
An ARM might seem like a good idea due to its tempting starting rate, but it is not because an ARM interest rate will keep rising and falling throughout the loan’s term. On the other hand, a pre-fixed rate might be a better option. It will stay the same during the whole period which will help you keep your grounds and know your numbers ahead of time. Believe us, the last thing you want is a mortgage with an unstable interest rate that will mess up your cash flow.
Real estate investment tips: A clean credit profile is crucial
The first thing that your bank will check is your credit score. This determines whether you qualify for a loan or not. To get a low interest mortgage, you should have a high credit score. Generally, you will get a high interest if your credit score is less than 740. So, keep track of your credit score if you are interested in getting a good interest rate. Never delay your payments, make them on time, and deal with errors instantly.
Real estate investment tips: Organize your paperwork
Constantly be prepared for all the important documents you will need to provide along the way to make sure everything goes smoothly and fast, especially routine papers that money lenders usually require. These include proofs of your financial situation such as bank statements and certification of employment. If you are a freelancer, you will need different certification from CPA as well as tons of other paperwork depending on your situation. Some lenders may require divorce papers if applicable, legal status, or other reports of financial obligations that do not appear on your credit report. So, do not pile up your papers, and keep all documentation organized and prepared to make sure that the process goes as easily as possible.
Real estate investment tips: Acknowledge that the value of your property is not the only thing you are going to pay for
It is not only about paying for the real estate investment property. You should take into account other expenses along the way. Some of them are expected, while others might pop up unexpectedly. Plan for the operating expenses, maintenance costs, and other running costs on the side and keep a margin of your budget for other unexpected expenses.
Final of our real estate investment tips: Use Mashvisor
What could be better than having a guide along the way? Use Mashvisor for all types of real estate investment tips. It provides a wide range of blogs on all topics related to property investments. You can also use our investment property calculator to calculate your return on investment as well as your cash flow. In addition, you can find blogs about cap rate and other real estate metrics that you must know.
Related: How Should You Use Mashvisore’s Heat Map Generator to Your Advantage As a Real Estate Investor?
When it comes to real estate property investments and financing your investment property, always do your research. Remember that what worked for others might not work for you. Look through the variety of financing methods available and compare them before making a decision. Be realistic with your numbers. Pick a financial strategy that you can afford to fulfill your real estate investment goals in the long run.