The housing market crash has become a distant memory, and home prices are looking healthy again. But does that mean there are good opportunities for investing in the residential real estate market?
Home values are climbing in most places.
But while interest rates remain low, the days of quick, easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. Still, a little creativity and preparation can bring financing within reach of many real estate investors.
If you’re ready to borrow for a residential investment property, these four tips can improve your chances of success.
Make a sizable down payment
Since mortgage insurance won’t cover investment properties, you’ll need to put at least 20 percent down to secure traditional financing. If you can put down 25 percent, you may qualify for an even better interest rate.
If you don’t have the down payment money, you can try to obtain a second mortgage on the property, but it’s likely to be an uphill struggle.
Be a ‘strong borrower’
Although many factors — among them the loan-to-value ratio and the policies of the lender you’re dealing with — can influence the terms of a loan on an investment property, you’ll want to know your credit score before attempting a deal.
“Below (a score of) 720, it can start to cost you additional money for the same interest rate,”
The alternative to paying points if your score is below 720 is to accept a higher interest rate.
In addition, having reserves in the bank to pay all your expenses — personal and investment-related — for at least six months has become part of the lending equation.
Shy away from big banks
If your down payment isn’t quite as big as it should be or if you have other extenuating circumstances, consider going to a Mortgage Broker for financing rather than a large national financial institution.
Mortgage brokers are the best option because they have access to a wide range of loan products — but do some research before settling on one.
What is their background? “Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.”
If you’re looking at a good property with a high chance of profit, consider securing a down payment or renovation money through a home equity line of credit, from credit cards or even via some life insurance policies.
Financing for the actual purchase of the property might be possible through private, personal loans from peer-to-peer lending sites like Lending Club,which connect investors with individual lenders.
Just be aware that you may be met with some skepticism, especially if you don’t have a long history of successful real estate investments. Some peer-to-peer groups also require that your credit history meet certain criteria.
When you’re borrowing from a person as opposed to an entity, that person is generally going to be more conservative and more protective of giving their money to a stranger.