– By Ashok Kumar, CFO, Creative Choice Group
There are dozens of ways to finance real estate today, but which are right for you depend on the type of property in which you wish to invest, the condition of your investment, and the amount you wish to borrow. As an investor, the strength of your portfolio can also affect the number of options available to you.
Real estate finance options for investors fall into several different categories. Solutions available to you range from hard-money loans to investment property mortgages to crowdfunding. That said, because investors are more likely to repay their loans than residential borrowers, you’re sure to find the financing you need with little hassle. Read on for tips on how to finance investment real estate and to explore viable options.
Double Your Down Payment:
Mortgage lenders will accept 5% to 10% down payments on residential properties because mortgage insurance covers residential real estate. It does not, however, cover investment properties. To make the risk worthwhile, lenders ask for at least a 20% down payment before they’ll approve a loan application. However, the more money you put down, the better. If you show up to the bank with 25% or more of the asking price, you’re likely to qualify for a better interest rate in addition to increasing your borrower appeal.
Turn to a Neighborhood Bank
If you’re new to investment real estate and either have a weak portfolio or little cash to put toward a down payment, your best bet would be to go through a local bank. Neighborhood banks have more flexibility than national institutions. Moreover, lenders at local banks are more familiar with the area and its market and have a more vested interest in what becomes of vacant properties. All of these factors could mean they’ll be more willing to work with you than real estate finance teams at larger institutions.
Boost Your Creditworthiness
Though many factors affect your ability to take out a mortgage, your credit score is the greatest influencer. If your score is below 740, expect to see a drastic increase in your interest rate. If you want to obtain the same interest rate as someone with a strong score, expect to pay big bucks for it. Either way, a low credit score will cost you. Before you embark on the loan application process, take measures to boost your creditworthiness. Your patience and hard work will pay off.
Explore Creative Options
If you lack strong credit, don’t have a lot to put down on the home, or cannot receive approval from traditional lending sources for any other reason, it may be time to get creative. Below are a few different options that might work for you:
- Home Equity Line of Credit: A home equity loan, or HELOC, maybe the financing solution you need if you don’t have enough liquid assets or cash to back your investment, but you do own a private residence. With HELOC, you would borrow against the equity in your home. However, bear in mind that you risk losing your home if you cannot make the payments. If your home doesn’t have enough equity in it to back your investment, the lender may agree to let you borrow 20% of the investment property’s purchase price.
- Government-Backed Loan: Certain government-backed loans such as FHA loans and VA loans allow you to borrow money for investment properties, so long as you live in them for at least 12 months. Government-backed loans are particularly enticing to those who don’t mind living in the property while fixing it as they come with interest rates as low as 3.5%. Another incentive to go through the government is the fact that you don’t have to have a stellar credit score to receive approval. Borrowers with scores of 580 or higher may qualify for the low rates, while those with scores of between 500 and 579 can still qualify so long as they put 10% down. If you put less than 20% down, you would have to pay the premium on the mortgage insurance in addition to interest, taxes, and principal.
- Peer-to-Peer Lending: With online lending and crowdfunding becoming increasingly popular, more individuals with significant capital to spare are willing to take chances on aspiring entrepreneurs and property owners. Peer-to-peer lending involves seasoned real estate investors funding projects through unconventional loans. The borrowing requirements and regulations are less strict than those of traditional lending, meaning, if you qualify, you can generate the funds you need more quickly. However, many P2P lenders are only willing to lend on a low loan-to-value ratio. On average, these lenders front 65% of the costs, meaning you should strive to come up with at least a 35% down payment.
Obtaining financing for your investment property is not impossible. However, you may have to get more creative if you hope to receive adequate financing at affordable rates. Explore your real estate finance options with an experienced investor today.