Financing Investment Property

Some basic tips

When looking to finance investment property acquisitions, here are a few of the most basic tips you’ll want to consider before you begin your property search.  Figuring the best way to finance your investment will be one of the first steps you’ll need to take prior to spending a great deal of time and energy in locating a real estate investment.

Get to know your local lenders

There will be greater latitude with smaller, local banks.  Each local bank will have their own set of lending guidelines.  Get to know each lender’s guidelines, and their individual strengths and weaknesses.  Get local real estate agents to refer you to their “preferred” lenders.  These real estate pros should each give you three names.  See whose name pops up the most out of all local lenders, then work directly with them.

Make sure your credit is excellent before starting your search

Always know your credit score at any point in time.  Your score will have the greatest impact on your ability to secure a mortgage when financing investment property, as well as having a tremendous impact upon the interest rate you will be granted.  A score of 740 should be a bare minimum.  Preferably, you’ll need a score in the upper 700’s to low 800’s these days to ensure getting the best interest rates on real estate investment loans.

Be prepared to put up a large down payment

Unlike homeowner loans, banks assign greater risk to investment properties.  They therefore help lower that risk by asking for larger down payments.  Most lenders will require 25 to 30 percent down on most investment properties.  Some lenders require 40% or more, depending on your credit score.  The lower the score, the higher the down payment required.

Ask for some owner financing

Never be embarrassed to at least ask if the owner will consider SOME amount of owner participation when financing investment property – EVEN if they do not say they will on their property information listing sheet.  Always ask!  You never know just how desperate a seller’s situation may be, and you don’t want to pass up the opportunity to utilize other people’s money (OPM) when possible.

Think outside the box (creative financing options)

Use home equity lines of credit.  It’s an extremely cost-effective use of borrowed funds – as long as you’re aware of the potential dangers.  You need to set a conservative time horizon for the sale of the investment property to ensure a quick payback of borrowed home equity funds.  Otherwise, you’re asking for trouble – placing your own home in jeopardy.  In addition, consider short-term borrowing from credit cards – especially discounted credit card offers with zero percent or one or two percent charges on borrowed funds.  Of course, shop around for the lowest surcharge cards.  Most cards require some upfront surcharge – ranging from two to four percent on average.  Again, know your time horizon for holding your investment property acquisition – then choose the credit card offer that best fits your needs, and offers the most leeway in payback period. 

Another oft-used method of alternative financing is a shot-term loan from a relative.  This can work – but be sure to absolutely create a signed promissory note to your relative/friend/”angel.”  That way, everyone is on the same page, knows the repayment period, interest rate, and what will happen if you default.  At the end of the repayment period, you certainly want to retain your relative/friend/”angel” as someone who continues to hold you in high esteem.  Of course, you should always discuss these creative ways of financing investment property with your financial advisor prior to making any moves.  It just makes good business sense to get another outside professional opinion first.

 

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