Owning an investment property comes with many benefits. Not only can an investment property provide ongoing cash flow, it may also include tax benefits. However, obtaining an investment property of your own is a slightly complex process. Investment property loans are different from the standard home mortgage, so it’s important to arm yourself with knowledge to ensure your success.
Investment property loans can be used to purchase a new property or to refinance an existing one. Common examples of investment properties include single or multi-family homes, apartment complexes, condos, and more. It’s also possible to use an investment property loan for a commercial property such as a shopping mall or office building in addition to residential properties.
Getting a good loan from a good lender provides a great foundation for the future of your investment. Here are three things savvy buyers should keep in mind before taking the plunge.
MAKE SURE YOUR FINANCIAL DUCKS ARE IN A ROW
The first step to securing any kind of property loan is knowing what the lenders are looking for in a borrower. An ideal borrower poses as little risk to the lender as possible, which means your financial house needs to be in order.
Credit Score -- Lenders typically look for a minimum credit score between 630 and 700. It’s still possible to secure a loan with a low credit score, but expect to pay a higher interest rate.
Cash Reserves -- The money you have saved in the bank is also taken into consideration. Lenders generally look for at least six months of reserves for each property you own.
Cash Flow -- Lenders view your monthly cash flow in terms of your debt to income ratio. For example, if you have a monthly income of $5000 and $2000 in monthly debts, your debt to income would be 40%. Try to keep your cash flow as positive as possible.
CONSIDER BIG BANK ALTERNATIVES
Your first instinct may be to seek out a big bank to provide your investment property loan. However, you should know that there are plenty of alternatives to big banks for your lending needs.
Local banks or credit unions may offer more flexibility when it comes to approving loans compared to nationwide financial chains. Additionally, local institutions may be more familiar with the specific needs of the local market. Mortgage brokers may be a good choice as well, as they can provide many different lending options. Just be sure to do your homework, as mortgage brokers tend to work on commission.
If you are rejected by a big bank for an investment property loan, don’t give up hope. Do your research to find an appropriate alternative in your local area. A local bank or credit union might offer better options anyway.
BE AWARE OF COSTS BEYOND THE DOWN PAYMENT
You are generally expected to make a minimum down payment of 20% on an investment property. However, this is not the only cost you should have on your mind. Investment properties typically include additional costs that many first-time buyers may not be aware of.
Of course, like home mortgages, closing costs are still a part of the equation. Be sure to budget up to an extra 10% or more of the purchase price to cover closing costs. Also, be mindful of any repairs or updates that may be necessary for the property as well.
If you are purchasing an apartment or condo complex or a similar multi-family property, you may also want to leave space in your budget for homeowners association dues, cleaning services, flood insurance, utilities, maintenance, and other ongoing expenses. Remember, your rental property may go through periods of vacancies as well, so be prepared with financial resources to bridge the gaps.
With an investment property loan, you can generally expect higher interest rates, larger down payments, and different approval requirements compared to a typical home mortgage. However, if you can present yourself as an ideal borrower, find a lender you trust, and prepare for all of your costs, you too can reap the benefits of owning your own investment property.
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