Top 5 Tips for Financing Investment Property in 2022

After the sharp rise in home prices last year, the market appears to be slowing down. Despite this, price changes remain positive. The good news is that interest rates are still low, providing an opportunity for potential real estate investors who aren’t sitting on piles of cash.

While it is difficult on your own to choose a great investment property, how will you finance it once you find the perfect home or apartment? A little creativity and preparation can make financing affordable for many real estate investors.

Here are five tips for financing a real estate investment:

  • Make a huge deposit
  • Be a ‘strong borrower’
  • Go to a local bank
  • Ask for financing from the owner
  • Click on Your Ownership Rights

If you are ready to borrow a residential investment property, these tips can help you increase your chances of success.

1. Make a huge deposit

Since mortgage insurance does not cover investment properties, you generally need to cut at least 20 percent to secure conventional financing from a lender. If you can cut 25 percent, you may qualify for a better interest rate, according to mortgage broker Todd Huettner, president of Huettner Capital in Denver.

A bigger deposit gives you “more power in the game” and therefore you lose more if the investment fails. This can be a powerful incentive, and a larger down payment gives the bank more security against losing its investment. If the investment goes wrong, you will lose your entire stake before the bank starts losing money on the property.

If you don’t have the down payment amount, you can try to get a second mortgage on the property, but it will likely be an uphill battle.

2. Be a ‘strong borrower’

While many factors—including your loan-to-value ratio and your lender’s policies—can affect the loan terms on an investment property, check your credit score before attempting a deal.

“Below [score] 740, it can cost you extra money for the same interest,” Huettner says. “Under 740 you have to pay a fee to keep the interest the same. That can vary from a quarter to two points to keep the same rate.”

One point equals one percent of the mortgage loan. So one point on a $100,000 loan would equal $1,000. (This is when it is worth buying points).

An alternative to paying points if your score is less than 740 is to accept a higher interest rate.

In addition, having reserves in the bank to pay all your expenses – both personal and investment-related – for at least six months becomes part of the lending.

“If you have multiple properties for rent, (borrowers) now want reserves for each property,” Huettner says. “This way you won’t die if you have vacancies.”

3. Involve a local bank or broker

If your down payment isn’t as high as it should be or if you have other extenuating circumstances, consider turning to a nearby bank for financing rather than a major national financial institution.

“They’ll have more flexibility,” Huettner says. They may also know the local market better and be more interested in investing locally.

Mortgage brokers are another great option as they have access to a variety of loan products, but do some research before purchasing one.

“What is their background?” Huettner asks. Do they have a college degree? Do they belong to professional organizations? You have to do a little due diligence.”

4. Request for financing from the owner

Back when almost anyone qualified for a bank loan, the owner’s loan application was used to make sellers suspect potential buyers. But now it is more acceptable as credit has been tightened and the standards of borrowers have been raised.

However, you must have a game plan if you decide to go this route.

“You have to say, ‘I’d like to do owner financing with that amount and these terms,'” Huettner says.

This game plan shows the seller that you’re serious about the deal and that you’re ready to make a real deal based on the practical assumptions you’ve made.

5. Click on your stock

If you have significant capital in your primary residence or other investment property, you can use this as a form of financing. If you want to take advantage of your equity, there are several ways to do so.

What it comes down to:

Real estate is often a long-term game where profit comes with time. But no matter how you invest in real estate, you can make money if you follow smart investment principles.

If you are financing a home, make sure you pay as soon as you get the loan. So remember over time, when repaying the loan, to consider how you can further reduce interest costs based on your strong loan history, exceptional loan balance.

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