When starting up on your investment property, the most common problem you get is where do you get the necessary funds to turn your real estate into profits. Especially if you're low on funds or have a bad or low credit score, it might be difficult for you to take that next step.
To help you with, here are some tips that could help you get started with financing your investment properties.
1) Identify Your Financing Options
The first thing you gotta do is to identify your options. Knowing what your options make you flexible. It also helps you pick what is most suitable for your current financial situation. Assessing all financing options will help you weigh all of the pros and cons. It also helps you understand some finance terms during the whole process if you're new to it.
- Mortgage options - You can choose to loan at a fixed rate and adjustable rate mortgage (ARM). Fixed rates interest is unchangeable once you take out a loan while adjustable-rate goes up or down depending on the market. ARMs usually offer a lower interest rate compared to a fixed rate. You may end up having to pay more depending on the index. The index is the basis for the interest rates for ARM. But there are options in ARMs where you can cap how high and low your interest rate caps.
- Borrowing against home equity - Home equity loans enable you to borrow against your home's equity. They're also called the second mortgage because they're an addition to the mortgage that you already have. Home equity is a great option to pick when you need instant cash for just a few years. The downside of it is that they have a high-interest rate because it's riskier for the lender. The first mortgage lender gets the first claim to the home should the borrower fail to pay which explains why home equity loans have higher interest rates to alleviate this risk.
- Seller-Financed Loan - is a great option for individuals with poor credit score. Instead of a financial institution handling the mortgage process, the seller does it for you. It's also a great no-money-down strategy to pick. A seller-financed loan is a transaction that does not pay all cash at closing. The seller will prefer it to be paid overtime. This might be because the seller wants to reduce their taxable income or looking for a replacement for their income in their retirement. The most common seller-financed loan you'll get from is from seniors who are retired. They usually have enough money already that they don't care if they are paid immediately. Make sure that the property is debt-free to avoid complications.
- Lease Option - Lease option is a short term for lease with the option to buy the property. You rent the property until the contract expires. While within the contract, you have the option to buy the rented property. The property also can't be sold to others while the contract is still ongoing. This is a great option if you're unsure of the property and want to test it before purchasing it. It's also a great option for you if you don't have the exact amount to buy the property immediately.
- Private Money Lenders - If you're struggling to get a loan that you want from finance institutions maybe you can try private money lenders. Private money lenders are individuals who are looking to get a high profit from their established wealth. It's much easier to get a loan from them cause there is usually low requirements and very few fees needed. As a safety net for them, their investment is secured by a mortgage or a promissory note that states if the borrower is unable to pay, they can take the property as a means of payment.
- Hard Money Lenders - Hard money lenders are almost the same with private money lenders but they are somewhat more professional in their approach and is solely focus on real estate investments. Hard money lending is only beneficial for short-term loans and isn't advisable for long-term. Why so? Because it has a really high-interest rate, high fees, and short term lengths. Before getting one always have an exit plan in case your investment fails.
- Short Sales - If you're looking to buy low for investment properties then maybe you should consider short sales. A short sale is selling the property for less than its value. This either happens because the property owner is having financial difficulties or if the property is owned by a lending institution. Do take note that the agreed price between the buyer and the homeowner must be approved by the bank, who technically owns the property.
- Foreclosures - Foreclosure happens when the borrower missed a certain number of payments on the mortgage. The lender initiates a foreclosure proceeding which will allow the lender to seize the property. The property is then auctioned off in order to repay the mortgage.
- 203k Loan - a 203k loan is a specialized loan by the Federal Housing Administration. Its purpose is to give a loan to people who are planning to rehabilitate or repair damaged properties. The total loan you get is the price of the property plus the estimated funds needed to repair the property. 203k loans are very enticing because they have a very low down payment of at least 3.5%. However, you're not allowed to DIY the property. You need to hire a professional contractor and construction consultant before the loan gets approved.
Now that we've looked into different financial options it's time that we give tips on how to approach with these options.
- What Are Investment Property Loans?
- Where to Get Investment Property Loans for Rental Property
- What Newbies Should Know About Financing Investment Properties
2) Choose Your Loan Wisely
First off, you need to assess your current financial status. Are you planning to acquire wealth through selling homes or are you buying one? How many funds do you have right now? If the investment fails what are your backups? There are many things that you need to keep in mind.
First off, you need to choose what loan you'll be picking. Is it suitable for your current situation? If you need money for the short-term then home equity loans might be suitable for you. All options have different pros and cons. Therefore, it's important that you know what you're getting and what risk is there when you try to get it.
3) Don't Do It Just Because You Can
I know a lot of people using home equity loans to use for really bad investment or just for the luxury of it. Our advice is to only use home equity loans when it raises the value of your property through renovations or when the property is damage that it becomes a threat to your family's safety.
You can also use home equity loans to pay off any high-interest debt that you currently have. The sooner you pay it off the lesser you'll incur losses.
4) Larger Down Payment May Turn to Lower Interest Rates
According to mortgage broker experts, you need to have at least 20% down payment in order to secure traditional financing. If you put it up higher like 25% then there's a high chance that you'll get a really good interest rate for your loans. You also have to take note that mortgage insurances don't cover investment properties.
5) Big Banks Aren't You're Only Option
Don't just have a mindset that the big banks have a great performance record. Try exploring your local neighborhood bank. It's a free market, which means it's a competition to get customers. You might find great flexible deals and interest rates at your local bank. Plus, if you're investing locally, they have better knowledge of the local market compared to big banks.
You can also try mortgage brokers but you also have to know them before taking out a loan. Mortgage brokers offer a variety of loan products but you also need to assess if they are authentic and professional.
6) Know What You Want and How to Get It
Say you've found a hidden gem in an old property, you know it will give you a huge profit but how do you acquire it? Always have a plan to execute when things like this happen. To start off, you could get a home equity line of credit to help you fix the property.
You can also use private money lending or personal loans to help you acquire the property. There are plenty of sites on the internet that helps connect investors with lenders.
However, if you're planning to be an investor make sure that you sell it especially if you have no real estate history. Remember that you'll be met with skepticism if you're new to real estate investments. So it's best that you look professional and know what you're doing so that the lenders can trust you.
There are various ways you can start financing for real estate investment properties. Even without a large pool of funds you can get started with investment properties and start acquiring those real estates and turn them into profit.
The most important thing is that you know the field and you have a sense of what you're doing. Remember that real estate also has its share of failures so don't give up when you get rejected.