3 Tips to Securing Financing for New Properties
There's a lot that goes into purchasing a property, from house hunting, to touring, to researching, and then to the actual buying process. Perhaps the part of the process that seems the most cumbersome is securing financing. This can appear especially daunting if you're looking to purchase an investment property. Don't let the perceived complexity of the mortgage process keep you from financing the money-making properties of your dreams. Here are three easy steps that will help demystify the financing process, and get you on the path to investment property ownership.
1. Understand the Down Payment Requirements
There are low- and no-down-payment programs for residential properties, but investment properties typically have significantly higher down payment requirements. The usual figure is around 20 percent, which shows the bank you have the liquid funds to invest in this project. Some banks do allow lower down payments, particularly if you already have existing investment properties that you're successfully paying off. Your business and personal credit also play a role in how much you're expected to come up with for a down payment.
2. Look at Professional Services
You could spend a lot of time learning the ins and outs of local property regulations, the tax implications inherent in purchasing investment properties, and a million other details that come with being a landlord. One of the early lessons you learn is that you can't do everything yourself if you want to scale your property management operations. Handling everything yourself works when you have one or two properties. When you start buying entire apartment buildings, you need a more sustainable setup, especially with complicated financing procedures.
Talk to lawyers and mortgage brokers who are familiar with the rules and regulations regarding investment properties in your area. It can be difficult to find all the information you need to successfully obtain financing for a property. The lawyer and mortgage brokers can advise you on the best course of action and help you avoid missteps.
Another important professional service provider to keep around is an accountant familiar with landlord tax requirements. The taxes on investment properties are more involved than the deductions you take for your primary home mortgage. Keep someone on your side who understands exactly what goes into tax filing, so you're always on top of your payment requirements.
3. Consider Your Management History
Some banks, such as Wells Fargo, allow you to use your property management history to determine whether you qualify for an investment property loan. If you have no problem attracting and retaining tenants, you don't necessarily need a large down payment or an equal amount of assets to back up the loan. The potential rental income is used as part of the loan determination when you have a proven history of successful property management. This financing tactic is useful when you see a home that's out of your price range when considering your existing collateral, but obtainable if the house's income stream is considered. Consider credit unions and other small-scale bank operations that put you in direct contact with the loan officer handling the mortgage process. When you have a person to talk to instead of a hidden underwriter, it's easier to make your case.
The financing process for a new investment property doesn't have to be daunting. Once you understand what banks, credit unions, and other financing sources are looking for, it's easier to streamline the process. Don't let worries about financing hold you back from scaling your property management business.
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