Real estate is generally considered a good investment. With enough planning, investment properties can be an effective way to generate passive income over a long period of time. It’s why financially secure individuals from all sorts of professions turn to real estate to start creating real wealth.
Unfortunately, it isn’t easy to get into real estate investing. It can cost a lot of money just to acquire a piece of land in the first place. On top of that, there are ongoing costs resulting from the inevitable maintenance work and renovations.
Things are further compounded by the fact that you have fewer options if you’re trying to secure a loan for an investment property. Lenders generally provide an array of options to borrowers looking to finance a primary residence. But when it comes to investment properties, insurers don’t even cover mortgage insurance.
There are still ways for you to finance a secondary property from which to generate income. Let’s take a look at the options and what you need to do to qualify for them.
Investment Property Lines of Credit Explained
An investment property line of credit is exactly what it sounds like: credit given to finance investment property. The quantum of money made available to an investor is determined based on a variety of factors including credit score and the loan-to-value ratio.
Once qualified for an investment property line of credit, you can draw cash from it as and when required. There are two kinds of investment property lines of credit depending on the number of properties you plan on acquiring.
Single Property Investment Line of Credit
A single property investment line of credit provides funds for the equity made available by one investment property. The rate for such a line of credit depends not just on the borrower’s credit score, but also the nature of the property in question. The specific terms of the loan are determined by the bank.
Investors can obtain a single property investment line of credit from a variety of sources including banks and credit unions. If those options don’t work in your area, you can also get in touch with private lenders to obtain a cash out refinance loan which can then be used towards an investment property.
Portfolio Property Investment Line of Credit
This financing option is reserved for high net worth individuals who have an existing portfolio of properties. Such investors use the lines of credit derived from their portfolio properties to purchase new properties or rejig existing ones. Portfolio property lines of credit have higher rates, generally contingent upon the financial status of the borrower.
Securing An Investment Property Line of Credit
Banks and credit unions take a number of factors into consideration when determining whether an individual qualifies for an investment property line of credit. Since these aren’t handed out for primary residences, lenders may feel like they’re taking on a bigger risk in such cases. Here are a few things you can do to increase your chances of qualifying for an investment property line of credit.
Maintain A Strong Credit Score
As with most other kinds of loans, a strong credit score can go a long way in getting you a good rate on an investment property line of credit. Banks want to make sure that you’re in good enough financial standing to make good on your repayments. Those who acquire rental properties are often required to show that they have the reserves to stay afloat if there is a gap between tenants.
Consider Neighborhood Banks
One way to go about financing an investment property is by circumventing national banks and big-name lenders. These are known to have very strict criteria based on which they lend money for real estate investing.
Local banks are more likely to be more open to handing out funds that lead to investment and development in the area. They tend to have a better understanding of the local market and are more flexible with their qualification criteria.
Make a Large Down Payment
We’ve already talked about how mortgage insurance isn’t offered on investment properties. As a result, investors are required to put down 20% of the amount up front in order to receive financing. Putting down an even higher percentage can lead to a better interest rate being set on the loan. This is an option for those who have the capital to make a large down payment.
Using a HELOC to Fund Investment Property
When you think of ways to fund an investment property, a home equity line of credit (HELOC) is probably not the first thing that comes to mind. But there are ways you can go about financing properties that you have invested in using a HELOC.
The easiest way to do that is by using a HELOC to pay for renovations of your investment properties. This can be a good way to for investors who own a portfolio of rental properties to cover costs.
You could also purchase additional properties using a HELOC, but it will be harder to find lenders who allow that. That’s because defaulting on a primary residence is a very real risk for borrowers, whereas an investment property can be seen as more disposable. So you will have to do your research to find out which financial institutions provide HELOCs on investment properties.
The best way to acquire investment properties in a profitable way is by hiring a real estate agent. Agents are able to combine information on your financial situation with local market data to unearth the best lenders for you.
Clever’s Partner Agents can help you find the best investment property opportunities in your area. We partner with the top-rated agents in each city so you can make the most well-informed investment choices. Clever Partner Agents offer clients rebates of up to 1% on their commission once a deal has been closed.
Visit our website to find the best real estate agent to help with your next investment property.