Investing in real estate can be a sound financial decision, but financing a property is often one of the biggest hurdles to investing. Here are five tips to help you get started.
1. Tidy Up Your Credit
One of the most significant factors of obtaining financing is your credit. Your credit score and the full report tell lenders how well you repay your debts and what kind of financial difficulties you may have had in the past. A credit score above 740 is commonly recommended to obtain a good interest rate on a loan. You’ll also want to clear up any collections on your report.
2. Boost Your Savings
All lenders want to have some reassurance that you’ll pay back your loan. In addition to a solid credit score and report, it can help to have a good stash of cash in reserve. That way, if you have vacancies in your property or otherwise have a loss of income, you’ll have resources to keep you afloat. This can be especially helpful if you have more than one rental property or investment loan.
3. Conventional Loans
Once your finances are in good shape, it’s time to consider some of your loan options. First up is the conventional loan, something most homeowners are already familiar with. The typical down payment for this type of loan is 20 percent; however, lenders may ask for 30 percent down for an investment property purchase. Conventional mortgages are one of the most straightforward options, but if you already have a mortgage on your primary residence, be prepared to demonstrate that you have the resources to pay them both.
4. Short-Term Loans
Some investors are in it for the long-haul. Others want to flip an investment, or purchase a property, make renovations, and sell for a profit. Short-term loans, sometimes called “fix-and-flip” loans, can be an attractive option because they can be easier to qualify for as the property itself is used to back the loan. The estimated value after repairs is how the lender will determine whether you can pay your loan back, but they often come with steep interest rates up to 18 percent and require full payment within a year.
5. Tap Into Your Home Equity
If your current home has a sizeable amount of equity, you can tap into this with either a home equity loan or by refinancing with cash out. Many lenders will allow you to draw out up to 80 percent of the home’s value, which can then be used to purchase another property. Keep in mind that these options may extend the payback period for your existing mortgage, and both are likely to result in a different interest rate than what you’re currently paying. A home equity loan will have separate terms for the portion you’ve borrowed; refinancing will be subject to current interest rates.
Making Smart Decisions
Real estate investments may offer enticing prospective gains, but they all come with risks. By making sure your credit and cash reserves are in good condition and understanding the terms of any financing you apply for, you can help boost your rate of return and minimize losses.