7 Things Real Estate Newbies Need to Know About Financing Their Investment Property
As a real estate newbie you may have many questions about financing your investment property. Here are 7 things you need to know.
Your Credit Matters
As you look for banks, credit unions, or mortgage brokers, remember that your credit matters. In preparing to buy an investment property, keep your credit score high by paying all loans and credit cards on time. Reduce the number or amount of other loans you have in your name so that you can focus all of your resources on investing.
Plan for a Large Down Payment
Although some investors are paying all cash, that may not be plausible for you, especially as a newbie. Because lenders know that homeowners will default on investment loans first, they require a lower loan-to-value ratio which means a higher down payment for you. Plan to have saved 20-40% of the loan amount of your investment property as a down payment.
Investment Loans are More Expensive than Homeowner Loans
With investment properties, loans cost more. Period. Higher interest rates and lender fees add up quickly. In addition to your down payment plan to have other cash on hand to pay the increased costs of securing and investment loan. Also plan to have 3-6 months of expenses saved up as a cash reserve.
There is a Limit to the Number of Mortgages Allowed
Currently investors are limited to four mortgages to their name. There is a special program to get more funding of 5-10 investment properties if you meet certain qualifications. However, putting oneself in so much debt is a risky proposition.
Consider a Portfolio Lender
A portfolio lender is one who actually has the funds to loan to you within their business rather than getting the money from Fannie Mae or Freddie Mac. These types of lenders can be less restrictive in their terms and fees.
Consider Owner Occupied Mortgage
If you purchase a 4-plex and live in one unit, you can obtain an owner occupied mortgage with lower interest rates and lower down payments. This is a great way to get your feet wet in investing while limiting your risks.
Consider Saving Up to Pay Cash
As mentioned above, some investors are avoiding debt by investing with cash. In order to do this they may live well below their means and save up large amounts of money to invest. Others work extra for a number of years to build up large cash reserves.
Whatever your desires as a real estate investor, knowing all you can about financing your investment property will go a long way toward your success! For more information contact Oakwood Commercial Capital Group today.