Investing in real estate is an exciting endeavor, but it can also be tricky—particularly if you're new to the game. There's a lot to consider when you're looking for a property. Is it in a good area? Has it been maintained properly? Will you be able to rent it for more than what your mortgage and taxes cost? What are the current mortgage industry trends? Once you've finally settled on the rental property of your dreams, how will you finance it? Let's take a look at five key features you should pay attention to when it's time to finance an investment property.
1. Make a Sizable Down Payment
Depending on the type of loan you're going for—and the type of property you're looking to purchase—the required down payment will vary. For most loans, you'll need to put at least 20 percent down, but if you qualify for an FHA or other types of loans, you might be able to get away with as little as 3.5 percent down. The more you're able to put on the table, the more likely a lender is to consider your application because your cash shows that you've got skin in the game.
Bear in mind that if you're not planning to live in the residence, meaning you purchase a single-family home or a multi-family property in which you won't reside, you may be asked to put as much as 30 percent down to secure your loan. This leads to the next point.
2. Know What Kind of Property You Want to Purchase
If you're planning to live in your residence full time, it's usually easier to qualify for a mortgage. You won't need to put as much money down, and you'll have fewer hoops to jump through during the application process. If you won't be living in the property, however, the process is often more difficult. That's not to say it's impossible, and it's a great idea for landlords who are up to the challenge. But, it is important to understand that banks and lenders view applicants who won't be living in the property very differently.
3. Consider Different Types of Loans
There are many different types of loans, and some are better for certain investors than others. Here's a quick review of some of the most common loans investors use when they're purchasing rental properties:
- Conventional Loans. This is the type of loan most people are familiar with; it relies on your credit score, which needs to be at least 640 if you have a 25 percent down payment. The higher your credit score, the lower the down payment you'll be required to put down. Lenders also look at your debt-to-income ratio, and it's essential to understand that future rent you might obtain from the property is not factored into your income.
- Home Equity Loans. If you already own your own residence, you might be able to tap into existing equity to finance the purchase of an investment property.
- Hard Money Loans. Cash for hard money loans comes from individuals and companies who are specifically interested in real estate investments. They're typically faster to secure than conventional mortgage loans, but they're usually only available for a short term, meaning you'll be required to pay your investors back reasonably quickly.
4. Turn to a Local Bank or Credit Union
Local banks and credit unions often have the ability to be a little more flexible with their lending practices than big national banks. They're also more likely to know the local market and be able to offer suggestions that are most suitable for your unique situation. It's a lot easier to build a relationship with people at local organizations. Because they're more likely to keep your loan in-house (rather than selling it to another mortgage company), you won't likely have to deal with changes to payment addresses and online information mid-way through your loan.
5. Consider Using a Mortgage Broker
Mortgage brokers are people who are well-connected within the industry. Not only will they shop around for the best interest rate, lowest down payment, and loan types you might not have considered, but many of them will be able to put you in contact with professional property management services, handymen, cleaning companies, electricians, plumbers, and all the other people you'll need to ensure your rental property goes right after you've secured your loan.
The more homework you do upfront, the easier it'll be to obtain your investment property. When you're armed with these five tips, the process should be a little more straightforward, and before you know it, you'll be looking for your first tenants.
