So you are thinking becoming a property investor? There are several factors to consider when financing an investment property. We are going to discuss the basics to financing investment properties.
Great property at the right price.
Experienced property investors are sleuths at knowing the market that they want to purchase in. It is best that you know the market and live in that market, or a short distance away. This will give you good insight into your investment location as well as making the investment easier to manage.
Do your research by knowing the condition of the property. Get an independent competitive market assessment on the property from a realtor that knows the market. There are several good online resources to also check the estimated property value from the following links:
I recommend taking an average of these values to come-up with a reasonable purchase price. The important part is to make sure that the selling price is a percentage below the value of what is quoted from these search engines which means more profit in your wallet.
Look for Below Market Value Properties
Also, look for properties that are substantially below the local market value. In today’s market this could be as much as 30 to 40 percent. For example the value of the property is $500,000. You would not want a purchase price that is valued over $300,000. In this example you get $200,000 in instant equity, smaller down payment and shorten the time for return on your investment. You may not think properties at these low prices are available, but with the housing market in the tank and many houses bank owned or selling short, the deals exist.
To get financing from any large bank you will need a minimum of 30 to 35 percent down in today’s market. Take your time and make sure that you have adequate resources before arranging for financing. To quickly gain savings for a down payment set-up a automatic payment plan. In very short order you will notice that your savings is starting to grow for the required down payment.
Another way you might find resources for the down payment is with other assets that you are currently not using: such as undeveloped land, a third car, or an RV or boat you purchased but never really used. By selling these assets you can rapidly meet the financial requirements for an investment property.
In today’s market you want to be a strong borrower for investment property financing. The higher the score, the better. Most banks prefer to lend to investors with a 740 plus credit score. It is a good idea to check your credit report from www.annualcreditreport.com and make sure that there are no errors on your report before seeking financing from the bank. Challenge any errors that you may find on your report with your creditors to get them resolved. If your score is not at 740, not to worry you will just need to have a larger down payment.
It is also recommended and required by some lenders to have a minimum of six months of financial reserves for your investment property. You may ask why six months? This is if your property is not currently rented, or for the times that you are in-between renters, or if you have a late paying renter. By having six months of financial reserves you will be able to sleep better at night if you have issues with your renters. You banker will sleep better as well.
Alternative Financing Investment Properties
If you are unable to secure funding from a bank there are other options. These options include using a community bank, credit union, or mortgage broker. These lenders have different requirements and maybe able to assist if the traditional routes are not successful. There are other options also including peer-to-peer lending. A couple internet resources include the following:
Good luck with financing your investment property. With these tips, you are on your way to becoming successful in property investing!