Stepping out into the world of investment properties is a great way to take your family’s future into your own hands. Over the years, no single asset has created wealth for investors quite like real estate. And despite the concern that many people have for the real estate market these days, there are still plenty of great opportunities to be had for a smart investor.
As you look into financing options for an investment property you might be considering, you will quickly learn that financing for rental properties is an entirely different ball game compared to financing your primary residence.
While you might have been able to purchase your primary residence on a 30-year mortgage at a low interest rate with next to nothing down, that is not going to be possible with an investment property. You are likely going to be required to have more money up front, pay higher interest rates, and probably jump through a few more hoops regarding your personal finances.
Despite those added challenges, investment properties are often still well worth the extra effort as they can provide excellent returns. Let’s take a closer look at some of the most important things you will want to consider before you agree to purchase your first investment property:
Make Sure You Have Excellent Credit
Just as your credit score is important in qualifying for a mortgage on your primary residence, it is an essential element of qualifying for a mortgage on an investment property as well. Once again, there is a minimum credit score that you must have in order to qualify for any mortgage. But the higher your score, the better deal you are going to be able to get on your interest rate.
Having an excellent credit score is also a good way to establish a certain level of respect when you meet with a lender. Once they realize that you are credit-worthy, they will instantly take you more seriously and work harder to help you.
Have a Substantial Down Payment
When you purchased your primary residence, having a substantial down payment was nice, but not necessarily required. You won’t have that option with investment properties.
Most lenders are going to require you to have 20% of the purchase price as a down payment. Some might even push that number higher. There are rumors that some lenders are still doing mortgages on investment properties with only 10% down, but good luck finding one.
Both sellers and lenders want to know that you are serious, and if you combine a large down payment with a great credit score there will be no denying your intentions. But that also means you are going to have to come up with a sizable investment, so you better start saving.
Get Prequalified or Preapproved
Another way that you can demonstrate how serious your intentions are is to get prequalified or preapproved by your lender. This lets Realtors and sellers know that you will have no problem closing if they accept any offer you might make, which might just make them more inclined to accept.
Higher Interest Rates
If you are doing your research online using one of those mortgage calculators, make sure you factor in the fact that mortgages for investment properties are going to have higher interest rates than a mortgage on your primary residence.
You might be able to get a 30-year mortgage at 3.5% on your primary residence right now, but that number is likely going to be higher on an investment property. Make sure you factor this into your planning so that you are not shocked by the amount of the monthly payments.
Shop Around for Mortgages
One of the best tips for getting a great mortgage is to shop around as much as possible. Don’t just assume that everyone will give you the same interest rate and closing costs.
Many people have found that they are able to get much better deals when working with small, local mortgage companies. This may or may not be true in your community, but it literally costs you nothing to meet with a few different mortgage brokers and could save you thousands of dollars.
Where there is a will, there is a way. So if you have your mind set on purchasing an investment property, all you have to do if figure out how to make that vision a reality.
One popular way to do this is to look to the equity you might have accumulated in your primary residence. If there is some equity there, you might be able to refinance your current mortgage and take out enough cash to cover a down payment on your first investment property.
Home equity lines of credit are another great way to fund a down payment. Many banks will loan you 85-90% of your home’s appraised value at really fantastic interest rates.
Guard Your Downside
No matter how you plan to cover the costs of your new investment property, the most important thing you have to evaluate is the downside. Particularly for your first investment property, you are going to want to make sure that you will remain financially stable even if you are completely wrong about the house you purchase.
You should have a plan in place for how you might cover the mortgage payments in the event that you aren’t able to find a tenant. As a landlord, you also need to have money set aside to handle any urgent repairs that might need immediate attention.
Purchasing your first investment property is definitely taking a big step up from purchasing your primary residence, and how you finance that investment is going to play a big part in the process.
Make sure that you get all your ducks in a row before committing to buy, and make sure you have a plan in place to manage the property after the closing. Once you have a plan to cover the details, take the plunge and enjoy the ride!
Your local Carrington Real Estate Services agent can help walk you through the process of finding a potential investment property and arranging financing. Contact an agent today.