The real estate industry has proven, time and again, that it can be a moneymaker. However, if you’re thinking about dipping your toes in the waters of real estate, there are a lot of things that you have to carefully consider to limit risks. Market knowledge is, of course, necessary to achieve the highest ROI, not to mention the challenges that the day-to-day operation of your rental property brings.
Market knowledge can be obtained by studying readily-available resources over the Internet. Also, you can work with a property management company to ensure that your new venture will provide security through long-term income. However, one obstacle that you have to deal with yourself is the financing required for you to get into the property investment game. The good news is that many financing options exist, so finding one is easy. It all actually boils down to how you prepare for it since financing investment property isn’t as easy as it sounds.
To help you take the path to success when financing your first investment property, this post will give you five tips on how to do it right. Check them out below.
- Invest Some Time Preparing
The best terms and rates for a mortgage are usually offered to those people who can show that they’re responsible with money. That said, you have to really prepare yourself when planning to take out one. So, how do you increase your chances of getting approved for a loan? There are two primary things you can do. The first is to pay any existing debt down. Pay off in full a car loan, a credit card debt, or a student loan. If you don’t have the ability to pay them down yet, then, make an effort to at least significantly reduce them.
Aside from paying down your existing debt, you also have to review your credit history. Check for charge-offs, old delinquencies, or any errors as those things could make lenders hesitant to approve your loan application. Write a letter to the bureaus requesting for the fixing of any erroneous or outdated information in your record. You can also talk to a financial advisor or a credit counselor to discuss possible ways of boosting your credit score.
- Organize Essential Financial Documents
Having the right financial documentation that shows your income and cash reserves goes a long way in speeding up the process of your loan application. Your financial documents are very important since most lenders will look for them to make sure that you have the available cash, or at least a steady flow of income to cover any existing obligations you have and the new loan you want to secure.
The documentations you have to prepare include recent pay stubs, bank statements, income statements, forms 1099s and W-2s, as well as tax returns. Prepare anything you can think of that relates to your current income. If you have new income sources that aren’t reflected in your previous tax returns, make sure to include them, too.
- Work On The Amount Needed For The Down Payment
Investment properties don’t qualify for mortgage insurance. So, you can now ditch the idea of using mortgage insurance to lower the down payment for your prospective property. Chances are you need at least 20% down for you to get financing approval from a lender, so work on that amount as soon as possible. It’s essential to note, however, that putting more money to the down payment makes your chances of securing financing higher and better. That 20% is actually just the minimum.
- Find A Business Partner
Don’t hesitate to look for a co-investor or a funding partner if you think that financing the property on your own is impossible. You can actually get additional startup funds from private sources, such as your family, friends, and business associates. You can also try crowdfunding services.
Keep in mind that when it comes to finding a business partner, the sky is the limit. You can actually ask up to 20 people you know if they want to be part of your investment idea. While it’s possible to enter into the traditional 50-50 partnership, limiting yourself to only one investor means you have to put in a larger amount of money. Get creative and assess your needs carefully. To help you with all the necessary paperwork, consider hiring a real estate lawyer. Working with an accountant will also make annual tax returns easier to accomplish.
- Document Your Target Property’s Cash Flow
There are asset-based lenders. These are the types of lenders who will most likely approve your loan application if they get satisfied with your target property’s debt coverage ratio. Instead of being primarily concerned with your credit score or your current income levels, asset-based lenders look at the property’s projected income ratio to the total amount that you have to pay for the mortgage, including taxes and insurance. That said, don’t forget to document your target property’s cash flow and present it to the lender, especially if it’s performing very well.
Remember to always make smart decisions. Real estate investments come with risks despite offering enticing prospective gains. Aside from the things discussed above, make sure that you fully understand the terms of the financing you’re applying for. It won’t only minimize possible losses but also boost the rate of return.