Getting an Investment Property Loan for your 1st Property
The revival of real estate is a good sign for anyone looking to gain from the market, especially if you're looking for an investment property loan. However, it is also true that the history is full of real estate bubbles that caused massive financial losses to investors. These history lessons have made banks vary of giving loans to real estate investors. It also means that borrowers of investment property loans will have to confront the stricter rules set by the banks and financial institutions. Accordingly, this article is written to ensure that readers are aware of the basic that have always worked for buyers. Therefore, if you are looking for an investment property loan, the following five tips should help in making the right decision.
1. How Much Down Payment Should You Pay?
In the United States, it is typical for banks and financial institutions to ask for a minimum of 20 percent to 30 percent down payment from the borrower who is looking for an investment property loan. It means that you should be ready to provide at least $40,000 from your own pocket, if you are looking to buy an investment property worth $200,000. In fact, experts agree that a larger down payment is always beneficial for the buyer because it reduces the monthly payments and interest rates.
For first-time investors, paying a higher amount of down payment for an investment property loan makes a lot of sense because buyers will be able to afford the interest rate in case they default on their loans. For instance, a person paying a 20 percent down payment to buy a $350,000 property pays roughly $15,000 less interest per annum compared to another person who has only made 10 percent down payment for the investment property loan. In simple words, this just means that you'll be paying more in interest over the term of the loan if you have a lower down payment. Hence, paying a higher down payment is always a good idea when taking a conservative approach in real estate investing.
2. Balance your Financial Portfolio
While it is a good idea to pay a higher amount of down payment towards your investment property loan, it is also useful to keep track of your savings. If you want a loan, you should make sure that there is something left with you in your savings account. Smart investors always keep a nice balance of how much they would want to give the bank as a down payment and how much savings are left with them to save for larger capital expenses such as a roof or HVAC replacement.
Regarding personal savings, it is worth-mentioning that a bank lending officer will also make sure that buyers have enough savings to cover investment property expenses for at least six months. Therefore, you should not get a loan merely because you have enough money to pay for the down payment. Instead, a prudent investor will always look to balance the money in the bank with the amount required for the down payment. After making the down payment, investors should have sufficient savings in the bank to cover unforeseen negative financial circumstances. When balancing your finances, it also helps to pay discount points, if needed, to lower your interest rate, and reducing your monthly mortgage amount.
3. Select the Right Financial Institution
Selecting the right financial institution to lend you the money for an investment property loan is paramount to your success as an investor. For investors, who have experience in the real estate business, and who have good credit scores, it is reasonable to shop around for loans, from big banks that may have better terms for you.
On the other hand, if you are the first-time borrower of an investment property loan, it may be wise to go to a regional bank. Often, these regional banks have their pulse on the market, which means that they may be more willing to give loans to locals due to the inherent interest of local banks in the regional investment sector. Potential investors should prefer well-known regional banks that have strong and historic roots in the local markets because these are often better managed than small unknown regional banks.
4. Consider using an Independent Mortgage Broker
Another option for acquiring investment property loans is to get a quote from an independent mortgage broker. If it is the first time you are getting an investment property loan, visiting a mortgage broker should be a top priority. A mortgage broker can potentially shop around for you to find the most favorable loan option for you via their network of lenders. If you have a good credit history or you have enough savings in your account, this may be an option for you.
5. Try a Non-Recourse Loan
Another type of loan that is available is called a non-recourse loan. These types of loans generally carry a higher interest rate and require a higher down payment, however, the loan is secured by the property itself. In case of default, the issuer of the loan will not come after you the borrower personally. These type of loans usually do not look at debt-to-income ratios, since the loan is issued based on the investment property itself and not on the borrower. These types of loans are beneficial if the borrower already has a higher debt-to-income ratio and would need the loan to be secured by the property instead.
6. Consider Owner Financing
If traditional methods of acquiring an investment property loan fail, it is always better to look for alternate options such as owner financing. The owner financing is a method where the buyer of the investment property deals directly with the seller of the property. It means that negotiations and terms of payments are settled between the buyer and the seller, directly. In this case, banks and other financial institutions will not intervene as everything from down payment, duration of loan, and interest rates are determined by the seller and the buyer. Generally, the seller of the investment property will require a down payment ranging from 5% to 25%. It means that the buyer of the investment property loan will not need to pay a typical 20% down payment. In fact, he can get away with paying only 10% down payment. Overall, the buyer benefits from the low monthly rate and minimum initial payment.
On the other hand, buyers should be aware that sellers will likely want to go for a shorter life of the loan. The shorter life of the loan is not for everyone because the total payment of the investment property has to be paid in a relatively short amount of time. Therefore, the owner financing route should only be taken if you have considerable savings or will still generate cash flow even with the shorter life of the loan.
Always remember that real estate requires a lot of research, therefore you should take the time to understand the basic rules of investment. Most often, it is better to talk to an expert in the field. You may feel that paying additional amount to an expert is costly, but it pays off in the long-run. If you want to discuss real estate investing and how our property management company can assist you, give our office a call!