The housing market crash has become a distant memory, and home prices are looking healthy again. But does that mean there are good opportunities for investing in the residential real estate market?
Home values are climbing in most places. According to the National Association of Realtors, or NAR, 93 percent of major metro areas saw gains in prices for existing, single-family homes during the third quarter of 2018 compared with a year earlier.
But while interest rates remain low, the days of quick, easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. Still, a little creativity and preparation can bring financing within reach of many real estate investors.
If you’re ready to borrow for a residential investment property, these tips can improve your chances of success.
Tips to finance investment property:
Make a sizable down payment
Be a ‘strong borrower’
Shy away from big banks
Ask for owner financing
1. Make a sizable down payment
Since mortgage insurance won’t cover investment properties, you’ll need to put at least 20 percent down to secure traditional financing. If you can put down 25 percent, you may qualify for an even better interest rate, says mortgage broker Todd Huettner, president of Huettner Capital in Denver.
If you don’t have the down payment money, you can try to get a second mortgage on the property, but it’s likely to be an uphill struggle.
2. Be a ‘strong borrower’
Although many factors — among them the loan-to-value ratio and the policies of the lender you’re dealing with — can influence the terms of a loan on an investment property, you’ll want to check your credit score before attempting a deal.
“Below (a score of) 740, it can start to cost you additional money for the same interest rate,” Huettner says. “Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate.”
The alternative to paying points if your score is below 740 is to accept a higher interest rate.
In addition, having reserves in the bank to pay all your expenses — personal and investment-related — for at least six months has become part of the lending equation.
“If you have multiple rental properties, (lenders) now want reserves for each property,” Huettner says. “That way, if you have vacancies, you’re not dead.”
3. Shy away from big banks
If your down payment isn’t quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than a large national financial institution.
“They’re going to have a little more flexibility,” Huettner says. They also may know the local market better and have more interest in investing locally.
Mortgage brokers are another good option because they have access to a wide range of loan products — but do some research before settling on one.
“What is their background?” Huettner asks. “Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.”