Five Tips for Financing a New Investment Property

With Americans renting more homes than in the past 50 years, it’s an exciting time to purchase a new investment property. But when doing so, you want to get the best interest rates possible and ensure a monthly profit with your new investment. Here are five tips for financing your new investment of a property.

Buy the Property with Cash

If you have a healthy cash flow or significant savings, you might consider buying your investment property with cash in place of a traditional mortgage, or only borrow a small amount of the purchase price. Using cash helps reduce the stress of monthly mortgage payments and the need to qualify for a mortgage.

Purchasing an investment property in cash means that almost all your rental income is profit, and a property management company can help you maximize your earning potential. You can use the profit as part of your monthly income or roll it into a new investment property.

Maximize Your Credit Score

When looking for a mortgage, the largest factor for the interest rate and approval is your personal credit rating. You should get a copy of your credit report as a first step in purchasing an investment property. It’s possible that there are errors on your credit report that you need to dispute.

If you want your credit score to be a little higher so you can earn a lower interest rate, then consider paying down some of your debt. It’s best to use only about 15 percent of your available credit, and you want a history of responsibly using your credit accounts.

Find a Partner

If you have good credit but lack a down payment or the other way around, you could benefit from finding a partner to help finance the new investment property.A partner can help you arrange and get approval for financing more easily.

You can ask a family member or a close friend, but you should consider using an attorney to draw up a contract, so you and your partner know what your responsibility and reward are throughout the partnership.

Large Down Payment

If possible, use a large down payment to buy your investment property. In some cases, you can use a larger down payment to negotiate a lower interest rate and lower monthly payment. Since the down payment directly relates to the amount of profit you receive each month, it’s best to put more down since it hinges on the difference between the mortgage payment and the rent amount.

You want to put at least 20 percent of the purchase price down, or you risk paying mortgage insurance. Also, the down payment helps you to create equity in your investment property without waiting for the house’s value to increase over a period of a few years.

Ask the Owner to Finance the Property

If you aren’t able to secure a mortgage or can’t get a good interest rate, you might consider asking the current owner of the property to finance it.

When an owner finances the property, he gets to keep the interest as added profit. However, the owner is taking on more risk than they would if you got a mortgage and paid them for the property upfront. You might default on the loan, or they might find that they need a lump sum in the future. You want to make sure that a lawyer handles the paperwork to protect your investment.

Use these tips to make smart decisions when you decide to buy a new investment property.