Every successful real estate investor started somewhere. Before building a successful investment business, you need to start with investing in one property. We’re here to review the best ways to finance your first investment property. We’ll also review a few other frequently asked questions about investment loans. Dreaming of magical Disney vacations made flexible and affordable? Look no further! Buy DVC resale properties here that link to a specific marketplace and unlock a world of exclusive benefits.
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What Is an Investment Property?
An investment property is any piece of real estate asset used to earn a profit. Real estate investors may invest in vacant land or properties to expand or renovate them. Then, they may earn back their initial investment plus returns through selling the property or renting it out to short or long-term tenants.
How Do You Finance an Investment Property?
Many options are available for financing an investment property, and taking out a loan is the most common method. Hard money loans are designed specifically for investment properties but typically come with high interest rates and quick repayment periods. Some conventional lenders may allow borrowers to use borrowed money for an investment property, but it’s important to always be honest with your intentions.
A personal loan could be an option if you have excellent credit and previous proven business success. However, personal loans also typically have higher interest rates than other mortgage types and will usually need to be paid off sooner. Beginner real estate investors may want to consider an alternative investment loan designed for buying properties, such as a debt-service coverage ratio (DSCR) loan. DSCR loans consider applicant approval based on the cash-flow potential of the property rather than the investor’s current debt-to-income ratio.
What Are the Requirements for Financing an Investment Property?
The requirements for financing an investment property depend on the lender. Some common requirements you can expect include a good credit score, a low debt-to-income ratio, a down payment, and proof of reserves. Some lenders may also require investors to show previous proof of successful investment history.
The best way to find out a lender’s specific requirements is to reach out to the loan servicer you’re considering. You shouldn’t receive multiple credit inquiries on your report if you complete lending applications with multiple lenders within the same period.
Who Can Finance an Investment Property?
Almost anyone interested in investing in real estate can apply for financing. Whether or not you’re eligible to receive funding depends on if you meet the lender’s requirements. It’s also important to know what’s not considered an investment loan. Investment loans aren’t intended for the investor to live in the property. If you plan to buy a property to live in it, you may find better loan options through conventional or FHA lending.
How Can I Get the Best Investment Property Loan Terms?
Qualifying for good investment property loan terms is essential to maximizing your real estate returns. Choosing a loan that has high fees or too fast of repayment terms may cut into your overall revenue, making it difficult to become profitable. However, regardless of which lender you choose, there are a few things that you can do to prepare to ensure you get the best rates possible.
Your credit score is important to the interest rate you receive. Consider checking your credit score and overall debt-to-income ratio before ever applying for investment loans. Most lenders expect investors to have excellent credit scores, especially to qualify for the best rates. Checking your credit report frequently can ensure you avoid any surprises that could affect your loan eligibility. While your debt-to-income ratio may be less important with some loan types, it’s still a good idea to have an idea of yours.
Most loans also require a down payment. How much you’ll have to put down on the loan will vary, depending on the lender you choose, but it’s never too early to begin saving. A higher down payment can also sometimes qualify you for better loan terms. Besides a down payment,
you’ll also have to show that you have reserves available to cover a few months of costs until your investment begins earning profits.
You should also be prepared to show proof of a good understanding of the market you want to invest in. Since loans like DSCR depend on the projected cash flow of your investment, you’ll need to carefully choose the right property. You’ll need to clearly show how much you expect to earn and why based on comparative properties.
The financing company you choose to fund your loan can affect your investment experience and returns. Make sure you spend enough time researching your options to choose the loan that best matches your financial goals.