Investment property financing can be very different than the process you went through to finance your own home. On the other hand, it can also be very similar, depending on what kind of property you purchase.
Here are a seven of the most important things to know about financing your first investment property.
Duplexes, Triplexes and Quads Use Similar Financing as Single-Family Homes
One reason why investors LOVE these kinds of properties is the ease of financing available. Banks will usually treat these units the same as a home built for just one family, but the advantage to you is multiple income streams. Or, if you live in one of the units, your own mortgage is essentially paid for by your tenants.
Don’t Expect to Get By Without a Down Payment
If you go through traditional financing methods, you’ll need at least 20% for the down payment. That’s because you can’t get private mortgage insurance (PMI) for an investment property- only one that you live in.
Don’t have that kind of cash? You could always try to…
Buy as an Owner-Occupant
One great investment property financing strategy is to buy the home with the intent to live in it for 1-3 years. This gives you time to fix any issues and get a better rate from the bank.
Once your home is in better condition and you’re ready to move on, you can invest in the next house and rent out the first one.
This is a very popular strategy among investors that move frequently due to their jobs, such as military personnel.
Clean Up Your Credit Score
If you’ll need a mortgage for the property, you want the best possible credit score you can get. There are several things you can do to improve your score, but one of the most important things to remember is closing old credit lines will hurt your score.
For example, if you’ve had the same credit card for 10 years but don’t use it very often, keep it open! In fact, you should make a purchase on it at least several times a year and pay off the complete balance.
That way your credit doesn’t take the hit of a closed account, and you can keep the card in case of an emergency.
Banks Aren’t the Only Way
Depending on how much risk you’re willing to take, there are other possible options available. For example, you may be able to obtain financing from a peer-to-peer lending site such as Prosper.com or LendingClub.com. If you have a very low interest rate credit card with a high enough balance, you may be able to use it for the down payment for the investment home.
Just keep in mind that these methods of investment property financing are best for taking advantage of great deals only. Even though we’d hope those are the only kinds of investments you’re making, it’s even more important when you’re racking up a huge balance on a credit card!
Try Owner Financing
Owner financing is interesting, because it allows you to get started with no money out of your pocket and you won’t have a bank’s mortgage looming over your head.
The hardest part about owner financing is getting the owner to buy into the deal, which means selling it AND yourself well. Since this person is entrusting you to make the monthly payments, they’ll likely want to see that you make a decent income and have assets available in case you have trouble renting the place out.
Share the Wealth
You may have heard that it’s a bad idea to go into business with friends or family. And while that’s true, it’s still a viable option that helps many investors get their feet wet.
This is a great investment property financing strategy because it lets your friend or family make some extra money, while you are able to get started building equity. Here’s an example of how this may work:
Let’s say you find a great property, but don’t have the down payment available. However, your uncle John makes good money and is always looking for a great new investment. You have two options here, after selling your uncle on this great property:
- Have him front you the money, and you pay him back over time.
- He can buy the property for himself, and pay you a nice finder’s fee. You can use this to help as a down payment for the next great deal you find.
Bottom Line? Use Your Head
Even though the traditional investment property financing route is often the best, don’t rule out other methods. If you don’t have the cash available- and let’s face it, most new investors don’t- using an alternative strategy for your first or second investment is the best way to go. All you need to do is use your head, crunch a few numbers, consider the risks, and move forward!