There are many reasons why you should have a stake in investment property. When done right, it offers a great passive source of income, serves as a hedge against economic shocks, and there is also the prospect of appreciation in value. The list of benefits goes on and on.
The challenge, however, comes in the ownership of said asset. Compared to other investment assets such as bonds and stocks, investment property has a high initial cost of acquisition, often in the hundreds of thousands to millions. Most potential owners consider financing from a lender or a mortgage company to be able to secure an investment property.
In this article, the team from McCaw Property Management offers potential owners various financing options available to them and also provides some tips that might serve them well along the way.
First, let’s have a look at the various ways that you can secure financing for your investment property.
Traditional Bank Loan
This is the most common type of financing available in the market. A potential buyer would walk into their bank and request a loan to purchase an investment property. The bank will have a look at your credit history and also your credit score to determine whether you are a worthy candidate. Your income and other assets will be assessed as well.
Typically, the lender will request a down payment. For a home loan, the bank asks for 20% down payment. The percentage goes up to at least 30% for an investment property.
This type of financing is a personal transaction between you and the bank and is not backed by any federal institution such as the U.S. Department of Agriculture or Federal Home Administration.
Private Loans
This is a loan from one person to another as the name suggests. It could be from a family friend or a family member. If such an option doesn’t exist for you, consider looking up private money lenders through networking events.
The loan will take up a similar format as a traditional bank loan with interest rates and a payback period set. Terms set may be favorable or extremely harsh depending on the relationship, referral, or simply how the lender woke up that morning.
You will be expected to sign some legal contract that will make the loan legal and binding.
Using Home Equity
Through the use of a home equity line of credit, a home equity loan, or a cash-out refinance, you can secure cash from your home equity. If the property is located in a prime location, a lender may be willing to offer close to 80% of the home value to the purchase of the new asset.
Hard Money Loan
If you are looking for a short-term loan, the best suited for you is a hard money loan. This is ideal for flipping property as opposed to the more long-term option of holding property for a long period or renting it to the available tenant pool.
The advantage of the hard money loan is that it is easier to qualify for it compared to a traditional loan. A loan can be agreed upon within a matter of days. The downside is the higher interest rate. Due to the risk associated with the type of investment, the bank will raise the interest rate. In addition, the payback period may be shorter, often less than a year.
Financing Tips to Guide You on Your Investment Journey
From our experience in the Dallas/Fort Worth property market, here are some tips that will help you get the best financing terms and ease your investment journey.
Size of the Down Payment
The lender is always looking for ways to reduce the risk that they are exposed to. As the borrower, you can alleviate their anxiety by putting down a larger-than-normal deposit for your investment property.
As a rule of thumb, most lenders will expect you to put down a down payment of at least 30%. We recommend doing 30 to 40% percent. This eases the lender’s worries and also shows that you are more than invested. The lender might give you better mortgage terms such as a lower interest rate or a longer payment plan.
Good Credit Score
How good or bad is your credit score? This will determine several terms of the financing, in particular, the loaned amount, the interest rate, and repayment plan. A bad credit score gives off the perception that you are a risky borrower and the bank will have to take considerable measures to protect itself.
Build up your credit score over time by paying off your loans on time and properly managing your credit accounts. Choosing to get a loan should not be something you wake up in the morning and decide you want to do. You must be intentional about it and slowly build up to it.
Consider a Local Bank
We understand the fascination and the intrigue that comes with approaching a big bank. But should there be a possibility, consider a neighborhood or local bank over a national institution with a branch in every state.
Smaller financial institutions offer their clients more flexibility and personable relationships.
Bottom Line
Owning real estate is not a hop, skip, and jump kind of scenario. It requires that you put in the work to analyze various options available to you and make the best choice for you. The technical nature of real estate sometimes makes it hard for investors to make an informed choice. That’s why they rely on property professionals to guide them appropriately.
McCaw Property Management is the trusted service provider in the Dallas/Fort Worth region having offered sound and professional advice for over two decades. We take great pride in our knowledge of the local property market and years of practical expertise.
Ready to invest in the Dallas/Fort Worth area? There is no better property company to help you navigate the technical issues of real estate. Get in touch with us today and receive a quote of our property solutions.