Best 12 Tips for Investment Property Financing
Investment property is a great way to build wealth, but investing in real estate can be challenging. This is where investment property financing comes in. There are many different types of investment property financing out there, and it’s important that you understand them all. Finding the best type of investment finance depends on two main things: your cash flow need and the type of asset you wish to purchase. To make an informed decision, it’s important to know how much money you need each month without paying too much interest or having to dip into savings. Once you have this information, you will be able to find the right type of investment financing. This article discusses tips for investment property financing.
1. Begin by Making Substantial Down Payment
If you want to buy an investment property, it’s crucial that you make a substantial down payment towards the property. While it may seem like a good idea to save up all of the money you would normally use for monthly bills, saving money isn’t always the most effective form of budgeting. You need to begin with a large down payment because when interest rates start rising again, you won’t have any extra money to pay off the remaining balance of the mortgage. If you don’t put enough money down at the beginning, this could prevent you from getting the full value of your property.
2. Choose The Right Loan Type For You
Before purchasing an investment property, the first step is deciding which kind of loan type you should get. Typically, if you are buying a property as a second home, you probably won’t require any insurance since you are not using the property as a primary residence. However, if you plan to live in the property long-term, you will probably need to obtain renters insurance. Different loan types also affect the price of your mortgage, and therefore it’s important not to choose a loan type based solely on what makes financial sense for you. You only want to focus on loan types that offer the highest rate of return while still being affordable. A couple of examples of common loan types include short-term loans (30-days to 180 days) and rental property.
3. Maintain Good Credit
Not only does poor credit hurt your chances of obtaining a low-interest loan, but bad credit affects the terms of your deal. With Quickline Capital Partners, we go beyond the credit score! When you apply for a loan for your property, typical lenders review your credit report every time they do business with you. A higher number of negative items listed on your credit report usually means that they aren’t going to give you the lowest possible interest rate and the best terms. Having no credit history or one account closed or unpaid can seriously damage your credit score for years after that event happens. It’s essential that you work on improving your credit score whenever possible. One easy way to improve your credit is to open new accounts such as utilities, cell phone, gas, and internet. Doing these things keeps your name active in other people’s eyes and builds positive numbers on your credit report.
4. Consider a Fixed-Rate Mortgage
When calculating whether or not you’ll be able to afford the mortgage payments on investment property, one of the major factors to consider is your income. Because the interest rate doesn’t change over the life of the loan, it’s harder to calculate the true cost of ownership compared to other loan types. In addition to the potential benefit of knowing exactly how much you owe on the property, many owners prefer taking advantage of the tax benefits associated with fixed-rate loans. Since interest expense is deductible at IRS, taking a fixed-rate option will lower your overall taxable income. This will help you reduce taxes owed at year-end and ultimately boost your net worth. Our rental property Loan purchase option is a great solution for this option.
5. Prepare Your Paperwork
Now that you have decided how you will finance your property, the next step is ensuring that everything is filed properly when you close escrow. Different closing documents are required depending on your state laws and the type of loan you obtained. Also, some lenders don’t allow certain types of loans within their portfolio, so make sure you check whether theirs is one of those lenders before choosing them. Here’s a quick list of documents you will most likely receive from a typical lender once you close escrow: Title Insurance Policy & Escrow Instructions, Property Disclosure Statement, Appraisal Report, Deed of Trust, Notice of Sale/Sale Notice, Settlement Statements, Deed, Bill of Sale and Assignment of Rents. With Quickline Capital Partners, we offer a LOW DOC loan option on our rental property financing and a streamlined process to collect and sign everything online.
6. Understand the Rules Behind Real Estate Investing Loans
Before signing anything, always read through the fine print. For example, there are rules concerning how your money must be used. Remember to ask about the seller’s agent’s commission; this is a fee paid by the buyer to the real estate agent who represents them. There will be costs involved in selling the property, think repairs and staging the house and you may want to find out how you will be reimbursed.
You may also want to know about fees charged during the process. All of these variables will impact the exact amount of your payback. When looking into financing options, make sure you understand any special rules regarding taxes and insurance. Read the entire contract carefully to ensure that you know all details. Even though the bank won’t offer you a specific rate, they should explain the terms clearly. Once you agree to the terms, you need to pay off the debt as soon as possible. If you cannot repay the full amount of the loan within 12 months, then the lender has the right to charge additional fees. So if you plan on refinancing your mortgage, make sure you get a good deal quickly.
7. Turn to a local bank or broker
If you can’t find suitable funding sources for an investment property purchase, try turning to a local financial institution. They may specialize in commercial rather than home loans. Alternatively, you might be better off talking to a mortgage broker. Brokers work directly with a large group of lenders and often create customized packages based on each client’s needs. However, brokers usually charge higher fees for their services. Ultimately, the choice comes down to whether you value being treated like a priority customer or having access to more competitive rates. However, it would be best to prioritize selecting an independent broker over a direct lender since many of the former are less regulated and not subject to government oversight.
Although the government does regulate the lending industry, it does so indirectly through the Federal Housing Finance Agency (FHFA). The FHFC only makes its decisions after receiving feedback from the industry. This prevents the agency from making arbitrary changes to their policies, but they are free to change these guidelines at any point. On the other hand, lenders operate under strict laws and regulations. Therefore, they feel compelled to adhere to the regulatory requirements set by the federal government. In addition, they also have an incentive to protect investors by providing them with high-quality products and services.
8. Try to buy a property that fits your budget
When it comes to an investment property purchase, most people tend to focus too much on finding a dream home instead of realizing what exactly they have. Some people are willing to go beyond their budget to purchase the perfect place, while others stick to the boundaries even if it isn’t ideal. Instead of wasting time looking at properties, you don’t want, try focusing on what you can afford and finding one that works within your budget. It would be best if you kept in mind that, to finance a property, you will require a certain amount of cash upfront. This means that you will need to save some cash beforehand to come up with the required sum without any problems. However, the question remains: How do you choose the best investment opportunity? To answer this question, we have put together a list of benefits and features that will help you narrow down the selection and select the best investment opportunity. Here are several of the reasons why you should consider purchasing a residential rental property instead of other types of investments such as stocks and bonds.
9. Find an Investment Partner
An investment partner can be extremely important when starting from scratch. They can also make or break your business. If you find someone who has worked in the industry before, you are likely to reap more rewards than if you were to work alone. A good partner will also increase the chances of generating income and increasing profits. If you are planning your first deal, you may not know where to begin when it comes to selecting an investment partner. That does not mean that you shouldn’t take part in the decision-making process, but rather that you should involve yourself as little as possible. Such a partner should share similar values and beliefs.
Your main goal should be finding a trustworthy person who wants to work hard to achieve success. A partner should also understand the risks associated with the project. In addition, you can expect your partner to pay close attention to detail and monitor every aspect of the project. They should offer excellent customer service by listening to clients and answering questions about how things work and develop. They must also be skilled when it comes to handling negotiations. If you believe your partner lacks these skills, you should look elsewhere for a better match.
10. Use Technology to Save Money and Time
When purchasing a rental property, you will incur costs related to maintenance, repairs, and renovations at different times throughout the year. Unfortunately, these expenses can add up over time. You cannot prevent them completely, but technology can help keep them down. Using a service like Tenant Cloud, for example, you can create listings, accept applications, conduct background checks, send and accept online payments. In addition, you can add service providers’ information into the system to allow maintenance tickets to be created by the tenant and sent directly to the appropriate person. (with approval). A program like this can also reduce overhead costs and give you peace of mind knowing that everything is secure.
11. Consider Fix-n-Flip loans
If you are ready to buy without worrying much about monthly payments, a fix-and-flip loan might be just what you are looking for. This type of loan allows you to renovate a vacant house while paying back the money at a low-interest rate. You have to secure financing to cover the renovation costs and then sell the property once it is completed. These loans are often tailored specifically for investment properties, and you won’t have trouble meeting their requirements. When all goes according to plan, you will receive a portion of the property’s sale price after the lender takes its cut. The problem is that fix-n-flips are risky because there is always uncertainty involved. It helps to get as many estimates as possible before starting work to ensure that the cost stays within budget and you hit the floor running with very little leftovers. After all, you should never underestimate how much things will cost. At Quick Line Financial Partners we offer fix-n-flip loans meant to assist real estate investors in the purchasing, renovation, and selling of residential houses within a period of 12 months.
12. Consider Real Estate Refinance Options
Investment property refinancing, using the equity from your current home or other investment properties, rather than new money. As long as you meet the qualifications needed, you can save yourself a lot of time and hassle by getting cash out of your original property instead of investing more. If you already own a property you might be able to find better rates than those available for brand-new borrowers. Your property has more negotiating leverage since you are already a customer, and lenders know that you may be willing to wait longer to lock in the best deal (or take advantage of special offers).
On top of that, your pre-existing history is an asset that no one wants to lose. With these elements combined, it becomes easy to see why investors sometimes prefer to keep their current home over the traditional route of purchasing a new one. Of course, if your only goal is to boost your profits, you need to make sure you are taking the right steps. There will come a time when you will want to give up the security of a fixed income, but for now, it pays to hold tight.
Conclusion
Real estate is a long-term investment. So, if you are buying your first investment property, it is important to think like a business owner. While most investors aim to purchase the best, the savvy investor looks at both sides. Buying a property does not mean that you know everything; it means that you understand enough to ask questions and learn more. So, if you are thinking about opening doors for your future, start educating yourself, and you might find that learning the ropes is easier than you imagined. These tips will help put you ahead of the game.
Sources
https://www.forbes.com/sites/forbesrealestatecouncil/2021/01/25/four-options-to-finance-a-real-estate-investment/?sh=401a16ea4d28
https://www.investopedia.com/articles/investing/021016/complete-guide-financing-investment-property.asp
https://www.forbes.com/advisor/investing/rental-property-real-estate-investing/
