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| Investment Financing |
When it comes to buying a real estate investment property, the first deal is always the hardest. It can even prove to be a challenge for licensed real estate brokers. So if concerns about financing your first property are stopping you from getting started, here are some tips:
Check your credit score before you even begin; you should be looking for mistakes or reported items that will be easy for you to correct. If your credit is a little less-than-perfect, you still may be able to get pre-approved for a mortgage loan. In attempting to correct any errors or reported items on your credit score, don't do anything rash. That means, do not start closing off accounts or paying off collectors right before you apply for a mortgage loan. Believe it or not, that may actually hurt your credit.
If you find that you are not eligible for a loan, there are still options. Look for an investment partner to go in on the property with you, there are a lot of investors around that wish they owned more real estate but lack the time to locate and purchase properties. You may also be able to acquire a private loan. The interest rates are typically higher, but can be worth it if you can refinance or sell the property in a relatively short period of time.
Make sure you know what you want: a second home may offer better financing, but that all depends on where the home is located and what you plan to do with it. See a tax advisor to discuss how you plan to use the property and whether it would be better to buy a second home or an investment property. Know that if you are buying an investment property and you claim that you will be living in it you could end up in some legal trouble if it is discovered that you are not.
Crunch the numbers: Every investor has a different goal, some want to flip property quickly, some work in pre-construction, and some are just happy with owning a home they can rent out to tenants. Still other investors may just want to buy a vacation home in an area they like to visit; they may use it from time to time and rent it out the rest of the year for a profit. Whichever approach you decide to take, make sure you understand the numbers, including: the cost of financing, a down payment, advisor fees, repairs, etc. Be realistic about whether you can afford to make the mortgage payments for as long as it may take to find a buyer or a tenant.
Don't worry about down payments: Although some purchase agreements in the past required a 10% down payment, there are loans now that allow for 100% financing on investor properties. Another option is to get a first mortgage for 80% of the purchase price and a 10% home equity line of credit behind it for a total of 90% financing. Additionally, sellers may also offer to help out by agreeing to accept part of the purchase price in the form of a promissory note that you can pay off in the future.Certain loan programs allow sellers to contribute toward the closing costs to help minimize your out-of-pocket expenses. You also may be able to borrow against equity in your primary residence to come up with your down payment. If you still need another method, you may secure your down payment with funds you already have in a brokerage account, according to investor and loan expert Deborah A. Ten Brink, president of LLC Loan Network. She describes it this way:
"Sam wants to purchase an investment property for $100,000.00. Sam has a brokerage account with $50,000.00 in it. He must pledge 143% of the $25,000 down payment required by the lender or $35,750 (143% times $25,000.00 = $35,750.00). The funds are retained in his brokerage account, still accruing interest, but the lender puts a lien on the account to protect its interest, then loans him the full $100,000.00 to buy the property. When the investment property achieves 25% equity (proven by an appraisal) the lien on the account is released, and the pledged amount--plus accrued interest--is once again completely under the borrower's control.
Even if you have cash for a down payment, you may not want to tie it up in your new property. So, for example, Sam can open a certificate of deposit (CD) with the lender using his down payment funds of $25,000.00, and still borrow 100% of the purchase amount of $100,000.00. When the investment property achieves 25% equity (proven by an appraisal) the lien on the CD is released, and the CD--plus accrued interest--is returned to Sam."
Now that you have seen the possibilities, here are the steps you will want to take to make things move more smoothly:
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Gather your paperwork. Be prepared to provide copies of: two month's worth of bank statements, investment and retirement account statements, your last two pay stubs if you have a regular paycheck job, driver's license and Social Security card, and bankruptcy, divorce or separation papers if applicable. If you are self-employed, you may be asked for some or all of the following: business license or occupational license, letter from your CPA establishing two years' self-employment, last two year's tax returns, business bank statements, and/or business financial statements. |
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Assemble your team. You will want an accountant who understands investment property tax strategies; a realtor or real estate attorney who can help you make sure you use the properly worded contract and include the right contingencies; a mortgage professional with experience in investment properties; an attorney who understands asset protection to help you form the right structure for holding your investment property (often a limited liability company or LLC); and an experienced insurance agent. |
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Get pre-approved. Before you start house-hunting, get pre-approved for a loan through a mortgage broker or lender, and request it in writing. This piece of paper can be very helpful when you negotiate the purchase of a property since it gives the buyer greater assurance that you won't tie up the deal and not qualify. |
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Once you have prepared everything, it is time to invest. While you don't want to dive in blindly, if you have done your homework and have found a good deal, at some point you have to just go for it. If you can't seem to take the plunge, ask financial advisors to help you make progress, get involved with your local real estate investment club, or find an investor who can act as a sounding board.
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