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Financing Basics for First-Time Rental Property Owners

If you’re looking for a great way to create some revenue for the long-term, owning a rental property is a great way to go. However, there are several things you need to keep in mind before you just go out, buy a home, and start taking rental applications. Here are a few financing basics for first-time investment property owners.

Have a Significant Down Payment and Good Credit Score

Not everyone is cut out for owning an investment property. Most lenders understand this, which is why they want you to have a significant down payment and a good credit score. In most cases, you’re looking at about 20% cash and a 740 score or higher.

Why? The more personal money you put into the project, the higher the probability that you’ll stick with it and want to see it become successful. Likewise, they want to know that you pay your bills on time and have a sense of financial responsibility. The benefit of both of these things is that the more you’re able to put down and the higher the credit score you have, the lower the interest rate you’ll pay. This can save you thousands of dollars or more throughout the life of the investment.

Ask About Seller Financing

If you’re having a hard time qualifying for a traditional loan or mortgage, you can reach out to property management companies to discuss seller financing. This is where the seller of the property essentially becomes the lender. You make monthly payments to them to pay off the debt. If you fail to meet your obligation, they reserve to take over the property-no matter how much time or money you’ve invested.

It can be risky, and not all sellers are willing to take this path. This can especially be the case if they have existing home loans, which can cause the process of seller financing to be a little less profitable for them. Usually, when it comes to home loans, there tends to be a due-on-sale clause according to which the seller would have to pay his debt upon the sale of the house (find more information on blogs by Amerinote Xchange or similar sites). This might be difficult to do for some sellers, but it isn’t impossible, and many properties that need considerable renovation work or have been on the market are often excellent candidates. The key here is to be ready to show the owner what you plan to do and why it benefits them financially. If you can convince them of this, there’s a good chance they’ll agree to the deal.

Consider Gathering a Group of Investors

Another common option for funding your first investment property is gathering a group of investors. This eliminates the need for traditional financing and helps spread load the risk among multiple people. While it isn’t always ideal to have three or four different people involved in the process, it can be much more flexible than working with a traditional bank.

Furthermore, having business partners gives you the option to own the property free-and-clear while utilizing their skills and savvy to help make the process a success. For some people, this is a great way to get your feet wet without having to go through the process alone.

Show You Are Committed to the Project

No matter how you choose to finance your first investment property, it would help if you showed that you are committed to the project. This can include having a property management company picked out ahead of time, a report showing how you plan to renovate the property into something worthwhile, or a monthly breakdown of what you need to do to make the investment a success. The more information you can show, the better.

Of course, these are just a few basics when it comes to financing your first investment property. If you’re a seasoned veteran at buying a rental property, what else can you add to this list? Feel free to comment with your own tips!