How to Finance a Rental Property

Have you discovered the perfect real estate investment opportunity? Is there a home or building that you would like to purchase so you can make it a rental property in your portfolio? Financing a rental property can sometimes be a tricky business. The past, present, and future are all taken into consideration by lenders to determine if you are going to qualify! What do you need to know right now about the financing process?

Step #1: Examine the Past

After you submit your application for financing, a lender will thoroughly vet your background to determine the amount of risk they will assume in making a loan to you. This involves a complete review of your credit history, a look at your credit score, and a vetting of all your financial records. If you don't have a strong history of sound financial decisions that have built wealth over time, then it may be difficult to secure the financing that you need.

Step #2: Examine the Present

Most lenders are going to require at least 20% down on the agreed upon purchase price of a rental property to qualify you for a loan. You current debt-to-income ratio will be examine to see if your current income will be able to cover loan payment over the course of the loan. Even the history of the rental property itself will be examined for profitability.

If you have a rental property with several tenants who have all lived there for several years that you wish to purchase, then you'll have more success in this area than purchasing a property that has never been rented before. That doesn't mean new rental properties can't receive financing... it just means that you'll need to make sure you have solid plans in place to bring about profitability.

Step #3: Examine the Future

Although no one can predict the future, a lender is still going to look at what a future relationship with you is going to look like. Will you consistently make your payments on time? Will you manage the new property well? What kind of connections do you have in the community that can help you be successful in this business venture?

The best way to assure a lender that you've got your future plans set is to submit a full business plan with your financing application. With a 5 year or 10 year business plan, you'll be able to show the lender how you intend to transform your new rental property into a money making machine! If you take the time to create a comprehensive business plan that will show consistently profitability, then you may even receive a reduction in the down payment requirement of the loan.

Securing financing for a rental property ends with these three steps, but it begins by choosing a lender who is likely to approve you. Every hard credit inquiry brings about the possibility of a lower credit score, so narrow down your potential lenders, shop for the right loan, but limit applications so that you won't damage your credit too much as you secure your next rental property.
Posted on Jun 24, 2014


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