When it comes to investing, property is a very smart choice, and if you have had a chance to read our previous blog series about the benefits of investing in property, then we don’t need to convince you. One of the reasons why property is a good investment for many different people is because it’s much easier to secure financing for a property investment than it is for any other kind of investment. Only a small percentage of the total investment will actually come from your pocket, and the rest will be covered by financing, which your renters will pay off for you through the years. But securing financing for an investment property isn’t quite as simple as securing financing for a property you plan to live in, and that’s why our experienced property manager has come up with this list of tips for financing your investment property.
#1. Buy the property as an Owner Occupant (OO).
The easiest way to secure financing for a rental property is to buy it as an OO and plan to live in it for as long as the loan you choose requires — typically, you’ll be required to live at the property anywhere from 12 to 36 months. Here are a few benefits of going this route when you finance your investment property:
OO loans have better financing terms.
You have more options with an OO loan, and you may not have to put as much down.
You have a chance to get to know the property and address any issues before you turn it into a rental.
You’ll avoid having to make two house payments at once while you’re still doing any repairs or renovations to your rental.
It will prevent you from buying an investment property you wouldn’t want to live in yourself.
#2. Make sure you have a sizable down payment.
Mortgage insurance doesn’t cover rental properties, so you’ll need to save at least 20 percent for your down payment. However, it’s important to keep in mind that, the bigger your down payment, the better rates you’ll qualify for, so try to aim for 25 percent or higher if possible. If you don’t have the cash on hand, here are a couple options you can consider to secure a down payment for your loan:
Home Equity Loan or Home Equity Line of Credit (HELOC) - You can borrow from the equity you’ve earned in your primary residence to finance your investment property.
Cash-Out Refinance - In a Cash-Out Refinance, you would essentially take out a new mortgage on your existing home for more than you owe. The new mortgage would cover the debt you have on your existing home, and you’d get the difference as a “cash out.” A Cash-Out Refinance allows you to use your existing home to secure a new loan, and you can usually borrow up to 80 percent of the value of your home.
#3. Steer clear of financing from big banks.
If you don’t think you’ll be able to secure the full 20 percent you need for a down payment and an OO loan is not an option, you will probably have better luck finding financing for your investment property if you don’t go through one of the big, national banks. Local lenders are more interested in local investments, and in most cases, they have a little bit more wiggle room and flexibility than the bigger banks. You should also consider talking to a mortgage broker, as they have access to a much wider range of financing products. No matter which lender you go with, be sure to do your research and ask around before you settle on one. And remember, there’s no rule that says you can’t talk to more than one lender, so don’t be afraid to shop around before you make any commitments. As you can see, financing an investment property is slightly more complicated than financing a property you plan to call your residence, but you still have many options at your disposal. Once your find the right financing option for your needs, turn to Stowers Real Estate. We can help you find the perfect rental property, and we can even manage it for you! Visit us online today to check out the available properties in Walnut Creek and the surrounding areas.