Real estate is usually a solid investment for anyone looking for big returns and a semi-passive income. This is true whether you’re buying a property to flip or rent. But financing investment properties isn’t quite the same as financing a primary residence. You usually need better credit, a bigger down payment, and more leverage. But that doesn’t mean it can’t be done, even if you’re not sure you are quite there yet. It may just mean you need to get a bit creative when it comes to your options. And following some of these tips will help.
Work on your credit first
If you have less than perfect credit, financing an investment property can be difficult and expensive. So, it’s important to do everything you can to raise your credit score before you even start looking for one. It does usually take some time, but if your score is already fairly decent, it might not take as long as you think.
The first thing experts recommend is combing your credit reports for possible errors. Many people have items that are misreported on their records, and disputing them should get them removed and give your score an instant boost.
Next, you can work on the factors affecting your credit score the most. Scores are calculated using five factors including payment history, accounts owed, length of credit history, new credit, and credit mix. So, let’s say your main issue is using too much of your credit. This is one of the biggest factors of your score, and it’s under the category of “accounts owed.” Most credit experts say that you should keep this category at under 30 percent. In other words, you should always have open lines of credit.
So, in the case of someone using 80 percent of their available credit, they can either pay down the loan or open up another account. Obviously, paying some of your debt off is more advisable since you’re trying to get a loan for property. But if you take out a personal loan or home equity loan in this step, you can use it for your down payment once you’re approved.
Fund your down payment
Unfortunately, mortgage insurance doesn’t cover investment properties. This means you’ll be required to put at least 20 percent down to close the deal. But putting even more down is always advisable because it could get you a much better interest rate.
If you don’t happen to have that amount of cash, you might have to figure out a creative way to get it. For example, consider using a credit card, personal loan, or taking out a home equity line of credit. Or you might be able to find a willing party to invest in your venture. And a partner doesn’t have to have much control. Usually they’re willing to be merely silent investor for a percentage of your earnings.
Borrow locally
In order to walk into any bank and get a mortgage on an investment property, you’ll probably need to meet a few key criteria. This includes an excellent credit score (800-850), large down payment, and plenty of capital. If this applies to you, it probably won’t matter where you go. Your only concern will likely be finding the institution with the best terms. But if even one element is missing, you might have a lot more to prove.
For most people, a smaller local bank or other financial institution will probably be your best bet. They offer a little more flexibility and can usually take more factors into account than just your portfolio. For example, a credit union in Comstock Park, MI might take into consideration your many local endeavors. They might look at your background, service work, and commitment to excellence in your profession. That’s not to say they won’t require some financial assurance, but they are usually a little more lenient.
Another way to borrow locally is simply to ask for owner financing. In many cases, owners are willing to finance properties to solid candidates for a much lower interest rate. They may initially ask you to fill out a rental application and begin a rent-to-own process. But whether this will work for you or not will depend largely on what you want to do with the property. Just be sure to discuss your plans and details with the owner and include any provisions in the terms of your agreement.
