You want to break into the real estate market and start building your fortune but there is one big problem….you don’t have the money. Most people who invest in real estate don’t either and they need to find some way to secure financing. If you are a home owner then you have already been through the mortgage process and that was fairly easy but buying investment property is a whole different ball game. Financing your investment properties can be tricky. Traditional lenders have stricter guidelines. Let’s look at how financing your investment properties differs from buying your own home.
Higher Interest Rates
These loans are considered riskier so the bank is going to charge you more for the privilege of using their money. You can expect to add a couple of points to the interest rate so if your home mortgage is at 4% then you can expect a 5-7% interest rate for an investment mortgage.
Your Credit Score
Your credit score matters with any type of loan it is the bank’s way of looking at your ability to pay and your willingness to pay when it comes to loans. This is the biggest factor in determining whether you will get a loan and for how much. Keep a close eye on your credit score and take every opportunity to improve it. A lower score doesn’t mean you can get financing it does however make it more expensive. Here are some tips on improving your credit score.
Higher Down Payments
Get used to 20% down it is pretty much the industry standard when it comes to investment properties. Yes there are exceptions but for the most part you will need it. The good news is that you won’t be required to pay for mortgage insurance. You are also going to need some operating capital, the banks won’t take you seriously if you’re not prepared to have some cash on hand. At the same time you don’t want to be broke if the furnace dies in your new property either.
Buy a Multifamily as Your Primary Residence
If you haven’t bought your primary home yet then consider getting a multifamily and living in it as your first property. You can still qualify for a traditional mortgage which has much better terms live in one of the units while renting out the rest. Ideally you want your tenants to be paying the mortgage for you while you save what you would pay in rent to and use it to buy more properties or to pay down your existing mortgage quickly.