Despite a certain level of volatility in the national and global economies, the U.S. housing market has rebounded strongly, opening the door for an influx of new real estate investors.
For seasoned real estate investors, the upswing of the housing market has simply opened another area to play in, because investors find ways to make the market work for them despite volatility. With prices stabilizing in most of the major markets, it is the ideal time for new real estate investors to get their feet wet; however there are many potential investors that are somewhat apprehensive due to the uncertainty of their ability to effectively procure real estate investor financing.
The truth is that there are multitudinous methods that can be used to acquire the financing necessary to invest in residential real estate; however, many of them require creativity and flexibility. This article will present some of the best tips to help new real estate investors learn how to consistently acquire financing for their investment properties.
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Partnering with other Real Estate Investors
Joint ventures sit at the top of the list due to the fact that a joint venture presents a number of benefits in addition to the ability to raise capital. The best real estate investors are not necessarily the ones who have everything or know everything. Rather, they are the ones that are smart enough to surround themselves with people that know what they don’t. Hence, building a solid investment team is one of the best ways to, not only enhance financing options, but also, increase the level of collective experience and expertise.
Some benefits of creating a joint real estate venture are:
- Shared liability
- Fewer tax burdens
- Stronger borrowing and buying power (increased capital)
- Increased collective investing IQ
The venture with other real estate investors has the power to influence the approval decision of potential lenders. Lenders consider numerous variables when assessing risk factors for potential investors. Working as a part of a collective theoretically improves the chances of being approved for financing. Depending on the size of the group, the weak link, as far as credit score can be omitted from the application, subsequently improving the chance of loan approval.
When building an investment team, it is wise to ensure that each investor has something unique to add to the team, so that the collective seems strong to the lender.
Have a Sizable Down Payment
Although this is not always possible and there are ways around it, a sizable down payment will open you or your group up to more conventional financing options. Mortgage insurance does not cover investment properties, so in order to qualify for a more traditional style loan you will have to put down a minimum of 20 percent. If you are able to put down 25 percent, you will qualify for an even lower interest rate and typically required for real estate investment financing.
If you don’t have the down payment, there are some ways that you can come up with it, especially if you prefer a conventional loan. One of the most common methods of acquiring the down payment is through obtaining what is known as a second mortgage. This is not always easy to do, but it is a viable way to come up with at leave 20 percent of the loan. There are agencies who specialize in helping investors obtain loans that are specifically designed for investment properties.
Be a Strong Borrower
There are a number of variables, including loan-to-value ratio and lender policies, which can impact the ability of an real estate investor to obtain a loan. However, the one variable that will have the greatest impact on your ability to obtain financing is your credit worthiness. This is why you should check your credit score before attempting to make a deal. If there are any adverse entries on the credit report that can be challenged and removed, that should be done first.
Due to some questionable lending practices that led to the financial crisis in the middle of the last decade, lending guidelines have become much stricter with most lenders. This means that any investor falling below a 740 FICO score will become increasingly more difficult to be approved.
This does not mean that an investor with a low FICO cannot still find financing, it simply means that some of the more conventional avenues will be closed to them.
One alternative for investors with a score below 740 is to pay points based on their score. This basically equates to paying a higher interest rate for the investment property. This is not necessarily a terrible thing, especially if there will be a rapid turnaround on the sale of the property in question.
Additionally, having reserve funds in the bank to cover any investment-related expenses for a minimum of six months after the property is acquired will also improve the chances of being approved with a lower score. If there are multiple investment properties, lenders now want to see reserves in the bank to cover expenses for each property.
Investors: What challenges did you face when acquiring financing for an investment property? Any tips or suggestions for first-time real estate investors? Leave a comment, and let’s chat!
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