If you're planning to start investing using rental real estate, it could be a great move to help secure your future. Rental real estate is a good way to avoid the ups-and-downs of the stock market and create a passive income for life. But, getting into the rental game calls for understanding the special needs of financing it. Here are 5 steps for successful financing.
Save, Save, Save. Investment properties often come with larger down payment requirements — north of 20% in many cases — so you should start with a big buffer of money available to use. You're also likely to find properties in need of updates, renovations, and repairs — all of which you will need some cash to accomplish. And, finally, being a landlord often requires having some extra cash to cover things like non-payment, vacant rentals, and legal processes.
Check Your Credit. The second thing you'll want to work on before buying a property is your credit score. Because investment loans are harder to get, you may find that you need an even better credit report than you might need for a first home. If there are any deficiencies on your credit report, work on getting them corrected or aging them off the score over time.
Bulk Up Your Budget. Ensure you have a very low debt-to-income ratio and little non-mortgage debt before approaching lenders. Lenders will generally not count future rent payments as part of your income, so don't include it when calculating things yourself. If you're stretched too thin on a monthly basis either with or without your rental property's monthly expenses, you may want to wait a little bit before proceeding.
Decide on a Type of Loan. There are a few different ways to finance an investment property. These include:
Conventional Mortgage Financing. You may be able to finance a single family rental home with a regular mortgage, although with a much higher down payment. However, adding a second mortgage may raise the amount of debt you owe to a point that your lender isn't eager to extend credit.
Home Equity Loan. If you have equity in your primary home, you may be able to tap into it for a second home. Some lenders allow you to use up to 90% of that home's equity, and it often comes with a very low interest rate.
Refinance. If you do have equity in the home, look into refinancing it to provide cash to use for a second property. While this may carry some fees upfront and puts your primary home at some risk, it can be a good way to get a property if you aren't being approved for financing.
Fix-and-Flip Loans. Flipping a few homes before settling into a rental property can be a way to build up some money for your landlord business. Loans designed especially for buying and fixing up houses in order to sell them quickly can be approved quicker than others and often rely largely on the value of the remodeled home for approval.
Shop Around. Once you have your ducks in a row, it's time to start shopping for financing. Be sure to check all sources of financing — local banks, credit unions, large banks, and specialty lenders — to determine the best interest rate, terms, and payments for your project.
Whatever route you take toward buying your first rental property, you're embarking on a great new chapter in your life that's sure to pay off over time. Click for more info.
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