Buying Your First Investment Property: Financing
Since our recovery from the housing market crash in 2008, home prices have been steadily on the rise. While the trend of increasing property valuation has been causing many to wonder if they’ve missed their window for buying properties, low interest rates are keeping the market ripe for investment. This week, we’re going to discuss the particulars of financing your first real estate investment, because few investors are sitting on the necessary capital to simply buy a property outright with cash. If you are, not only are you in a good position, but you’ll also find this piece particularly unhelpful. There are a few things you’ll want to keep in mind when purchasing a property, especially when it comes to financing. Most of the considerations we’re going to look into are things that will save money and thereby increase your overall return.
The Down Payment
As anyone who’s ever bought a home can tell you, the bigger your down payment, the better terms you’ll get on your mortgage, but things are a little different for the real estate investor. It’s very important to keep in mind that mortgage insurance won’t cover investment properties, and therefore you’re going to need at least 20% down to secure financing. As a rule, 25% or more is going to enable you to negotiate a lower interest rate, so again, a larger down payment is always preferable and doubly important for you as an investor.
Credit
More than your down payment, your credit score will affect the terms of your financing. It’s important to be a strong borrower, and to know what your credit score is before you consider buying a property and securing financing. If your score is below 740, then you’re going to have a pay a fee in order to get the same interest rate as a score of 740 or above. The only other alternative would be to pay a higher interest rate and, depending on how long you plan on keeping the property, that can raise your costs by thousands of dollars.
Lenders
When it comes to procuring your financing, it may help to stay away from national bank chains. The idea of “buying and borrowing local,” as it were, is to approach entities that may have greater flexibility due to their size and an interest in investing back into their local community. Credit unions are a great example of this, as they often have lower interest rates for loans and a more personal atmosphere. Again, this often translates into flexibility and easier negotiations. Local mortgage brokers are also an option, but you’ll want to carefully vet them before making the decision to work with them.
More than just simple steps and considerations, taking the time to develop good habits and practices over the long run is what will ultimately keep your financing costs low when buying your investment properties, which in turn widens your ROI when it the time comes to sell. Good credit, staying local with financing, and taking the time to save up an appropriately sized down payment all contribute to a successful investment and enable you to expand and keep buying and selling!
– Get It Right Solutions