Five Tips for Financing Investment Property

The housing market has finally bounced back after many years in dormancy. For many people, this is a great time to enter the investment property market and to build a portfolio of real estate options that can eventually pay for themselves with the right foresight and due diligence. But, how does one even begin the journey of being a landlord? What questions should someone ask if they’re interested in purchasing an investment property? What financing dos and don’ts should one consider before laying it all on the line? Let’s take a look!

1. Make a Sizable Down Payment

The amount of money you’ll need to put down depends on several factors, including your credit score, income, and debt-to-credit ratio. Obviously, the better your credit score and the lower your debt-to-credit ratio, the more likely you are to be approved for the loan, but there’s another factor many people don’t consider: whether you’ll be living in the property or not. If you purchase a multi-family dwelling and plan to live in one of the units, you’ll likely be able to put less money down. If you don’t plan to live in the property, you’ll typically need to put down around 20% to 25%.

2. Improve Your Credit Score

Anytime you want to purchase a property, it’s essential to have a good credit score, but it’s even more important with investment properties. For example, a single-family investment property will require a 25% down payment if your credit score is 640 and a debt-to-income (DTI) ratio of 36% or less. You’ll need a credit score of at least 700 if your DTI is 36% to 45% to qualify for a down payment of less than 25%. Building your credit takes time, so it’s important to understand these calculations long before you begin the buying process.

3. Know Your Loan Options

There are many different types of loans. For example, conventional loans have to conform to the guidelines set forth by Fannie Mae or Freddie Mack. FHA, VA, and USDA loans, on the other hand, are not backed by the federal government and may have different guidelines that you need to meet to qualify. Turn to a local bank for assistance or consider working with a broker who can shop several loan options to help you find the one that’s most suitable for your needs.

4. Know How Much Cash You’ll Need

The mortgage isn’t the only thing you’ll need to pay; you’ll also need cash for closing costs, the down payment, renovations, repairs, advertising and marketing, and anything else that involves proper property management. You don’t want to be house poor before you even get the keys to your new property. Budget for the unexpected and make sure you have enough liquid cash to live off of, even if that means pulling equity out of an existing property.

5. Put Money Towards Principle

The more mortgages you have on your credit report, the harder it becomes to get a new loan.So it makes sense to pay your mortgages down as quickly as possible if you want to invest in multiple properties. Contribute extra cash to the principle of your loan each month. That will reduce the overall cost of the loan by lowering the principle and minimizing overall interest paid.

Real estate investing isn’t for everyone, but for the people who do their homework upfront and understand the risks and rewards, it can be a lucrative market to enter into. With these five tips in mind, you’ll be well on your way to financing your first investment property when the right piece of real estate comes along.