Investing in real estate properties is one of the most effective ways to put your capital to work. Gone are those days when the house market crash was a nightmare for investors. For many investors, financing investment property is a radiant part of their investment portfolio.
However, selecting the right property for investment can be a difficult task, especially for an inexperienced investor. We have highlighted 5 simple tips that can make you a better investor. If you are planning to borrow loans to invest in a residential investment property, these simple tips can help you to reach your goals.
Improve Your Credit Score
Improvising your credit score is one of the most critical steps you have to take to become a smart investor. If you are applying for a bank loan, your credit score is going to play a significant role in the process. Whether it is an asset-based loan or a traditional mortgage loan, your credit score can be a game-changer.
Before approving your loan application, your lender will check your credit score rated by recognized bureaus. Your score will determine if you are eligible for the loan along with the percentage of down payment (if required), rate of interest, repaying terms, etc. A good credit score for a loan applicant is between 660 to 724, while 759 has an excellent rating.
Have a look at some points your lender will check when approving the loan.
- Credit history
- Credit score
- Current occupation
- Work experience
- Age
- Repayment period
- Value of the property, etc.
If you are applying for an investment property mortgage, your credit score must range between low to middle. Here, the problem is that an applicant with a low credit score may have to pay more as down payment, and the rate of interest can be above average.
Applicants who come with excellent credit score can enjoy the beneficial terms from the lender. Applicants with a low credit score will have to repay a higher sum in return. Here are some ways to maintain a good credit score:
- Pay your bills and instalments on time
- Keep credit balance low
- Clear credit card debt
- Open new credit accounts
- Choose long-term repayment period for loans
- Do not increase your debt massively at once
- Personalized the limit of credit, etc
Hence, you have to make sure that your credit score is in a good position so that you can get a loan for investment property or mortgage with flexible terms and conditions.
Apply for Traditional Bank Loans
If you have invested in a property before, you must be aware of the terms and conditions issued by your lender. Conventional financing or mortgage through a bank or mortgage broker can be a good option. The federal government sets rules and regulations of traditional bank loans.
In conventional bank loans, you can expect the percentage of the down payment is to be 20% of the total amount of purchase cost. However, if you have applied for an investment property, you may have to pay a minimum of 30% as a down payment. In conventional bank loans, your credit score and history will influence the approval and the rate of the interest for the private mortgage.
Key benefits of applying for conventional bank loans are:
- Lower interest rate
- Affordable monthly payment
- Longer repayment tenure
- Improves business credit
- You can lend money for various reasons
- Flexible terms and conditions
For investment property loans, the lenders often inspect the income and assets of the borrowers. Lenders perform such practices ensuring that the borrower is capable of repaying the monthly payments for the investment property.
In the case of investment property or private mortgage, the possibility of rental income in the future will not be counted in debt-to-income ratio calculation. In some cases, lenders request borrowers to deposit cash to cover mortgage obligations for at least six months.
Choose a Local Lender or Broker
Choosing a local lender or mortgage broker is another crucial step you need to take to finance an investment property smartly. If you prefer a sizeable national-level bank or any financial institution for a loan, the percentage of the down payment may not be as significant as you were expecting. However, choosing a local lender can be a smart move, as small players give more flexibility than large ones.
A local lender knows the local market better, and it may show considerable interest in investing in the local market. A mortgage broker, on the other hand, can be a reliable source to seek loans for property or private mortgage investment. Professional brokers are quite knowledgeable about various types of loan products.
However, as so many brokers options are available, you have to do thorough research to reach the right one. When choosing a broker, you must follow the points below:
- Reputation
- License
- Years of experience
- Online and social media activities
- Reviews and rantings
- Feedback of previous clients, etc
Hence, you can opt for either a local bank or any financial institutions in your locality or hire a mortgage broker to make the process simple with flexible terms and conditions. A straightforward approach for loans can make the process of property investment less-complex and a chance to receive a better outcome in returns.
Choose the Right Property to Invest In
Before you think about a financing investment property or private mortgage, you have to choose the right place for investment. One of the benefits of knocking the doors of asset-based lenders is that they will never show interest in your income, personal debt or the record of tax returns when approving loans for you.
It is because the loan is approved against a property, and the property should be valuable enough to justify the investment. Besides, the value of the property should suffice for repayment of the mortgage along with insurance and related taxes.
Asset-based lenders often calculate the debt service coverage ratio using a metric. Your property’s expected income will be divided by your monthly expenses. The ratio calculation is done in this way:
For example, if your property generates revenue of $1,200 and the amount of loan repayment is $1,000, the debt coverage ratio will be 1.2. A 1.2 ratio is minimum for your lenders, as they want to see more. Your lender will always expect your property to perform better, as the ratio can determine the rate of interest you have to pay your lender for a specific period.
Assets and Reserves
In most cases, lenders expect applicants to have a specific amount of capital as liquid reserves. However, not all lenders follow and maintain such rules. Liquid reserves are considered as an invested capital for a particular number of months worth the repayment for private mortgage financing.
However, liquid reserves worth three months can be the right choice. You can also come across the lenders who want liquid reserves worth at least six months. If you have a more liquid reserve, you will get more benefits and flexibility in terms and conditions issued by the lenders. If you are wondered about the percentage of down payment to finance an investment property or private mortgage, you should know that you will need a minimum of 20% down to finance a property or mortgage.
According to the rules, implemented on April 19th 2010, financing in investment property requires at least 20% down payment if the borrower wants to invest in non-owner occupied investment properties. For 1-2 units of owner-occupied properties, the borrower needs to pay at least 5% as a down payment with 95% max loan-to-value.
However, for 3-4 units of non-owner occupied investment properties, the borrower will have to pay at least 20% down payment with 80% max loan-to-value.
| Units | Owner-Occupied? | Down Payment | Max Loen-to-Value |
| 1-2 | Yes | 5% | 95% |
| 1-2 | No | 20% | 80% |
| 3-4 | Yes | 10% | 90% |
| 3-4 | No | 20% | 80% |
Although property investment is a long-term goal and its benefits become visible over time, investors who come with the right strategies and smart principles can taste early successes. You can opt for a private mortgage through banks, recognized financial organizations or mortgage broker. But you have to ensure that you can afford the instalments every month and reduce the rate of interest over time. The monthly payment is also going to be a significant factor. Keep note of the history of monthly payments and outstanding loan balance for your convenience and make the process hassle-free.