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
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!