If you’re looking to finance a rental or flip project for the first time, there are a few things you need to be aware of. Here are five great tips for financing investment property.
Tip #1: Be Prepared to Make a Sizable Down Payment
Before purchasing an investment property, you need to be prepared to make a sizable down payment. In most cases, this is a minimum of 20% but could be higher. The reason for this is that banks like to see that you’re putting in a monetary amount that’s equal to wanting a favorable outcome for the investment.
Tip #2: Know Your Credit Score
Next to having a sizable down payment, knowing your credit score is a must. If you have a rating below a 740, it could be difficult to obtain financing for a rental or investment property. Furthermore, this is generally the benchmark where it starts to cost more in interest for borrowers below this level. While it isn’t impossible to purchase an investment property with a lower score, it can be a little harder and more costly overall.
Tip #3: Consider Staying Local When Searching for Lenders
If you already have a decent down payment and a good credit score, it is also a good idea to try to stay local when it comes to searching for lenders. Credit unions and local banks often have requirements that are much more flexible for lending. The reason for this is that they know the area and understand whether you’ll be able to make a profit in a specific neighborhood. And, even if you have a pre-qualification from a national bank, consider taking the offer into a smaller bank for a review. They might also be able to shave a few points off the interest rate or make the terms a little more flexible for your needs.
Tip #4: Ask for Owner Financing
Another option is to ask for owner financing. If you feel as though you will make a decent profit after renovations, you might see if the current seller is willing to work with you to help make it possible. In this situation, you might even have the option of working together to reach the end result of a worthwhile profit. This is one of those situations where you really need to feel out the current owner to see if they are even willing, but sometimes it doesn’t hurt to ask as they might just agree!
Tip #5: Think Outside of the Box
If you feel as though you’ve exhausted all other opportunities, it might be time to get a little creative in financing investment property and go beyond traditional lending. Consider other options, such as asking friends or family members for or a loan or taking out a home equity line of credit on an existing property. You can also look to borrowing from a life insurance policy or retirement account but should contact a knowledgeable accountant before doing so as there could be tax ramifications to consider.
Finally, there’s another option to consider if you find all of this a little daunting. Hiring a home investment professional to help you navigate the process is an excellent way to finance investment property while navigating the risk. Not only does this give you access to their pool of resources and contacts, but their knowledge is also a good way to ensure you’re not putting yourself in a negative financial situation later.