After a sharp increase in house prices over the past year, it looks like the market is starting to slow down. Nevertheless, the price variations remain positive. The good news is that interest rates are still low, presenting an opportunity for potential real estate investors who aren’t sitting on heaps of money.
While it is hard enough to select a good real estate investment, once you find the perfect house or apartment, how do you go about financing it? A little creativity and preparation can put financing within the reach of many real estate investors.
Here are five tips for financing a real estate investment:
- Make a large deposit
- Be a “strong borrower”
- Turn to a local bank
- Apply for owner financing
- Tap your home equity
If you’re ready to borrow for residential investment property, these tips can help improve your chances of success.
1. Make a large deposit
Since mortgage insurance does not cover investment property, you will usually need to pay at least 20% to get traditional financing from a lender. If you can deposit 25 percent, you could get an even better interest rate, according to mortgage broker Todd Huettner, president of Huettner Capital in Denver.
A larger down payment gives you “more skin in the game” and therefore more to lose if the investment doesn’t work. This can be a powerful incentive, and a larger down payment also gives the bank more security against losing their investment. If the investment goes badly, you will lose your entire stake before the bank starts to lose money in the property.
If you don’t have the down payment money, you can try to get a second mortgage on the property, but it will likely be a tough struggle.
2. Be a “strong borrower”
While many factors, including the loan-to-value ratio and the policies of the lender you are dealing with, can influence the terms of an investment property loan, you will want to check your credit score before attempting a transaction. . .
“Below [a score of] 740, it can start costing you extra money for the same interest rate, ”says Huettner. “Below 740, you will have to pay a fee to keep the interest rate the same. It can range from a quarter point to 2 points to keep the same rate.
One point is equal to one percent of the mortgage. So one point on a loan of $ 100,000 would equal $ 1,000. (This is when it’s worth buying points.)
The alternative to paying points if your score is below 740 is to accept a higher interest rate.
Plus, having reserves in the bank to pay for all your expenses – personal and investment-related – for at least six months has become part of the credit equation.
“If you have multiple rental properties, (lenders) now want reserves for each property,” says Huettner. “That way, if you have any vacancies, you are not dead.
3. Contact a local bank or broker
If your down payment is not as large as it should be, or if you have other extenuating circumstances, consider going to a local bank for financing rather than a large national financial institution.
“They’re going to have a little more flexibility,” says Huettner. They may also know the local market better and have more interest in investing locally.
Mortgage brokers are another good option because they have access to a wide range of loan products, but do some research before you decide on one.
“What is their training? Huettner asks. “Do they have a college degree? Do they belong to professional organizations? You have to do a little due diligence.
4. Apply for owner financing
Back in the days when almost anyone could qualify for a bank loan, a request for homeowner financing made sellers wary of potential buyers. But now it’s more acceptable because credit has tightened and the standards for borrowers have increased.
However, you should have a game plan if you decide to go this route.
“You have to say, ‘I would like to do homeowner financing with this amount of money and these conditions,’” says Huettner. “You have to sell the seller on the owner’s financing and on you. “
This game plan shows the seller that you are serious about the transaction and that you are ready to close a real deal based on the practical assumptions you have presented.
5. Tap the equity in your home
If you have a large amount of equity in your primary residence or other investment property, you can use it as a form of financing. If you want to leverage the equity in your home, there are several ways you can go about it.
Home equity loan
One option for leveraging the equity in your home is a home equity loan. The advantage of these loans is that they are secured by the equity in your home. This allows interest rates to be relatively low with repayment terms of up to 30 years. For those with good credit, interest rates can be even lower.
A Home Equity Line of Credit (HELOC) is another way to leverage your home equity. These loans are also secured against the equity in your home, but in this case, you withdraw the funds as needed instead of a lump sum. HELOCs may have lower interest rates than home equity loans, but the interest rates are variable. So, you could find yourself paying a higher interest rate on your HELOC in the future.
Refinancing of collection
A refinance with withdrawal cash your existing mortgage and replace it with a new, larger one. It then gives you access to the difference between the old mortgage and the new one in the form of money. You can then use this money to finance your investment properties. The new loan often has a lower interest rate or a shorter repayment term.
Other creative financing options
If all else fails, sometimes you have to get creative. Fortunately, there are several other options available to finance your real estate investment.
Peer-to-peer loans have become popular in recent years with the emergence of several online lending platforms. It is a way for investors to connect with borrowers who need financing for a variety of purposes. Investors like them as a form of alternative investing, but, of course, there’s someone on the other side as well. Fees and interest rates are generally low, depending on creditworthiness.
Fixed rate loans
Fix-and-flip loans, as the name suggests, are generally short-term loans intended for house swimmers. These are hard money loans with interest rates typically between 12% and 18%, plus two to five points. If you come across a property that you want to repair and sell within the next 12-18 months, a fixed, reversible loan may be worth a look.
Life insurance policies
Life insurance can be viewed as a liquid asset (depending on the type), which is preferable for lenders. In particular, a permanent life insurance policy gives you easy access to cash. You can borrow against this money, which can help you when buying a new home. This makes you more attractive to lenders and may make it easier to obtain financing.
Credit Cards and Personal Loans
Credit cards and personal loans can be an easy way to finance part of the purchase of your home. Some credit cards have zero percent introductory offers, and personal loans can borrow up to around $ 100,000.
While both are a convenient form of financing, personal loans often have high interest rates, just like credit cards after any introductory offer. So, this shouldn’t be your first option, but it can provide additional funding in a pinch.
Margin loans are a line of credit that can be used to finance a property and is backed by a borrower’s investments. They are typically used as a short-term funding tool and come with a number of risks such as margin call and amplified losses if the value of your investment portfolio declines.
Using real estate to create retirement income
Real estate is a popular way for individuals to generate retirement income. In fact, it’s now Americans’ preferred long-term investment, according to a recent Bankrate study.
Part of this popularity is based on real estate producing a constant stream of income, as investors receive a regular monthly rent from their tenants. For retirees, a stable income is exactly the kind of security they seek when not fully employed.
And retirees have an advantage on that income. Over time, a well-managed property can increase its rents, putting more money in investors’ pockets each month. The value of the property may also increase. So when the time comes to sell or even invest in another property, equity can be leveraged. Of course, investment real estate has other advantages, especially around taxation.
If you don’t want to jump right into managing real estate, you can buy it through public real estate investment trusts (REITs) and let a professional manager take care of all the issues. REITs are extremely popular with retirees due to their constant dividends.
At the end of the line
Real estate is generally a long term game where wins tend to come over time. But no matter how you invest in real estate, you can make money if you follow smart investing principles.
When you finance a property, make sure you can afford the payments when you take out the loan. Then, as you pay off the loan over time, think about how you could further reduce interest charges based on your strong borrowing history and lower outstanding balance.
Note: Jennifer Acosta Scott wrote the original version of this story. Bob Haegele also contributed to a recent update.