How to Finance the Purchase of Investment Property
The time has come to make a move into an investment property. The business plan has been researched and developed. The profit and loss potential have been considered. Now it's time to secure the financing to purchase the investment property that has been on your radar. With mortgages at low-interest rates, wise investors are seeking to expand their real estate portfolio.
First, let's consider why investment properties are a good hedge. For one, there is only a finite amount of land. Secondly, there are solid opportunities for passive income. For investors with cash on hand, purchasing investment property then refinancing may seem counterintuitive but there are sound reasons for going this route.
Naturally, the ultimate goal of investing is to earn money, but how and where can an investor go to get the financial backing to make the dream a reality?
In the following, we will share popular options for securing the funds to invest in properties.
Private loans are used for both short- and long-term investors who need financing to compete with cash buyers. Let's face it, most people do not have cash on hand. Private money loans offer the investor to buy investment property with cash then refinance to secure the property.
This is a great option for those who may not qualify for a traditional loan or who need to act quickly.
When seeking out private loan lenders, take the time to get prequalified. Doing that will save precious time and give you a better chance to lock in the deal, especially in a competitive market.
Most homeowners are familiar with traditional bank mortgages. When approaching a lender for a loan, they will check your credit score, how much equity is available, and they will expect a down payment to secure the loan. This can range anywhere from 0% plus closing costs if there is a lot of equity above how much the investor wants to borrow; up to 30% for investment properties. The debt-to-income ratio will play a deciding factor, as will the borrower's credit history.
Traditional lenders tend to be more stringent about the businesses they work with because they too have to stay afloat. Their consideration is based upon their investment plan as well. They need to make smart business decisions too.
Use the Equity to Fix and Flip
There may be equity in your home to help ease the monetary grip of a lender. Investment properties are not limited to income from tenants. There is a huge movement of entrepreneurs who are hedging the equity of their home to buy a property on the cheap, fix it up and give it curb appeal, then flip it quickly before next month's bills are due.
If an investment property is a route you want to take to earn a living and put money in the bank, consider what type of investor you wish to be. Being a landlord can generate a good source of residual income but there are many pitfalls with this route. Consider that finding good tenants who pay on time is not always an easy task. Maintenance of said property must also be established. Fix and flips are great if you've got the tools and resources. Traditional banks will not consider potential income when assessing the profit and loss portion of the finance application.
At the end of the day, it is wise to research all avenues of financing and assess the risk of any business endeavor. While there is no guarantee for success, speaking to a financial advisor and mortgage counselor is a great place to start.