Buying an investment property is one of the most popular ways to build wealth. With
good reason too! Adding an investment property to your portfolio can create a new
income stream and provide diversification across a new asset class.
But, with record high prices and rising interest rates, financing an investment property
has become increasingly difficult. Despite these setbacks, it is not impossible and real
estate is still one of the best asset classes to invest in. So, in this article, we will be
discuss our top three tips to help you finance an investment property.
1. Have A Sizable Down Payment
In almost all cases, mortgage insurance will not cover loans for investment properties.
This means that you will need a down payment of at least 20% to 30% of the value of
the property. Most banks will not provide financing if your down payment is below 20%.
As a general rule of thumb, the larger of a down payment that you can put down, the
better. This is because:
1. A larger down payment (25%+) will often qualify you for a lower interest rate
2. A larger down payment increases your chances at getting approved for a loan
3. Putting down a larger down payment decreases your monthly mortgage payments,
therefore increasing your monthly profit margin
2. Improve Your Credit Profile
The next tip is to improve your credit profile. The best way to guarantee that your
mortgage application is approved and you get the lowest possible interest rate is to be a
strong borrower.
Having a strong borrower profile includes having a sizable downpayment, but it also
includes having a high credit score. You can check your credit score for free on
websites such as Credit Karma to check your credit score and get recommendations on
how to improve it.
Basic tips to improve your credit score include regularly making on-time payments,
limiting the amount you spend on credit cards, and watching how many open credit lines you have at any time.
3. Explore All of Your Borrowing Options
Depending on your goals and plans for your investment property, there are a wealth of
financing options for you to choose from. Some of your financing options include:
1. Conventional Loan/Bank Loan
When we say financing options, this is most likely what you think of. Similar to a
mortgage on your primary residence, you can take out a bank loan to finance your
investment property.
2. Fix-and-Flip Loans
As the name suggests, these loans are for investors who want to quickly purchase an
investment property, fix it, and flip it for a profit.
3. Use Your Home Equity
If you have significant equity in your primary residence or if you have another rental
property with significant equity, several financing options become available. Without
going in to too much detail here, you have the option to take out a HELOC, a home
equity loan, or do to a cash-out refinance.
Conclusion
Real Estate continues to be one of the best asset classes to add to your portfolio.
Whether you are looking for a new income stream or solid capital growth, an investment
property can provide both of those for you. Start with these tips and you will be a
property owner in no time!
Get in touch with us today! Call 540.825.8100 or email us at info@vhsmanagement.com to learn more about our property management services. For more updates and information from VHS Property Management follow our blog and find us on Facebook @vhsmanagement.