Real estate investing can be lucrative if you do it right. Owning an investment property can help you earn a monthly passive income, and act as a hedge when the financial market is unpredictable, among other perks.
That said, choosing the right investment property isn’t always easy. You have to consider many aspects including the property’s location and rental demand. Even once you find a property to invest in, you have to figure out how to go about financing it.
Buying an investment property is a huge financial commitment. As such, financing it can often be a challenge. Not only because the terms and conditions are stricter, but also because rental financing may not always be available from contemporary lenders.
If you’re looking to finance an investment property purchase, be it in or out of state, then this blog has you covered. Here are 7 tips on how you can finance your next investment purchase.
1. Make a Significant Down Payment
Investment properties aren’t covered by mortgage insurance policies. As such, you’ll need to make a sizable down payment in order to get financing from a lender. Generally speaking, expect to pay at least 20% of the home’s value.
Now, you should aim to put down a higher percentage in order to get better financing terms. Putting down, say, 25% can translate to lower fees and interest over the life of the loan. Your monthly mortgage may also be lower as well.
2. Have a Good Credit Score
The terms of a loan can be influenced by a number of factors; one of these factors is your credit score.
Generally speaking, a higher credit score will usually mean a lower interest rate. A higher score basically means you are a low-risk borrower, no matter your income. In fact, earning a higher income doesn’t automatically guarantee a high line of credit or regular payment history.
A good credit score is typically one above 740. Below this figure, you’ll have to pay a fee to have the interest rate remain constant. Usually, this ranges from a quarter of a point to two points to maintain the same interest rate.
One point translates to 1% of the loan. So, for instance, you’d need to pay a fee of $1,000 for a $100,000 mortgage loan. Alternatively, if you are not able to pay points, the other option would be to contend with a higher interest rate.
In addition, part of the lending equation also requires having reserves in the bank to offset any expenses for 6 months or more. This way, even if you encounter headwinds as a landlord, you’ll still be able to finance the mortgage.
3. Seek Financing from a Bank
If you have a sizable down payment to make other expenses in relation to your investment property, you may want to seek financing from a local bank or broker.
A local bank or broker will typically have a good understanding of the market and have local investment information for you.
Another option is to seek out mortgage brokers. They usually have access to various loan products to suit you. Make sure to ask the right questions and gather information to make sure they are a good fit with your vision. Ask them questions like:
- Which types of mortgage terms do you offer?
- What will my fees and payments be?
- What credit qualifications do you require?
- How much can I borrow?
- Are you a regulated broker?
- What is the interest rate and annual percentage rate?
4.Use Your Home’s Equity
You may also be able to secure an investment property by drawing on your home equity. Generally, you may be able to do so in three main ways: taking a home equity loan, or cash-out finance, or a home equity line of credit.
You may be able to get a loan of up to 80% of your home’s equity value to go towards financing your investment property.
There are pros and cons of tapping into a home equity loan to finance an investment property. The following are some of the pros.
- You may be able to obtain huge sums of money that you may not be able to qualify for using other avenues.
- They are often offered at lower interest rates than other types of debts.
- They are relatively quick to obtain.
The following are the cons of obtaining a home equity loan.
- Your home could be foreclosed if you’re unable to pay your home equity loan.
- Failure to pay on time will hurt your credit score.
- Your property could lose value and become worth less than you paid for it.
Therefore, before using equity to finance your home, make sure you know which loan type is best for you.
5. Other Financing Options
The following are other creative financing options you can consider to finance your investment property.
Life Insurance Policies
If you have a permanent life insurance policy, it can help you get easy access to cash. And while each insurance company will have its own rules in place, you may be able to borrow up to 90% against your life insurance.
Fix and Flip Loans
These are intended for house flippers, and they are generally short-term loans. The interest rates for these loans tend to range anywhere between 12% and 18%.
If you get a property that you can repair and sell within the next 12-18 months, this loan type could be ideal for you.
Peer to Peer Lending
Recently, this type of investment finance has become a popular type of lending. It enables an individual to obtain a loan directly from other individuals, cutting down middlemen. Fees and interest rates tend to be relatively low.
Overall
There you have it: 7 ways on how you can finance an investment property. If you’re looking to finance your investment property in Arizona, Paramount Realty Real Estate can help. Get in touch to learn more!
