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What Newbies Need To Know About Investment Property Financing

Basis for Payment for Business Transactions

You have big dreams of owning a property and resting young. You just don’t have the money to go out and buy things in cash (most of us don’t). This leads you to the path of financing with your local bank. Maybe you already own your own home and have gone through the process of getting approved and signing the mortgage. This should be easy then right? No, a home equity loan is not like your traditional home loan.

Lenders are stricter with capital writing than with personal loans. You may be wondering, but why? It is easy when you have capital and a personal residence and then you lose your job or things start to go south financially you will pay off your personal loan before anything else in worst case scenario. You don’t need to think ahead of your mortgage, because that’s where you live!

Interest rates

The interest rate will be higher than that of your mortgage, it just is. Add 1-3 percentage points more than a home owner loan. That means that if the lender is paying 4.00% interest on the home loan, you will be paying 5-7% interest on the loan. That’s how it works people. Loans will be more risky, so banks need more for them.

Credit score

As with any type of loan your credit is important. It tells the bank the history of your credit history and the reason why you should get a loan or why you shouldn’t get a loan. Working to make sure your credit is in good shape is one of the things you should do so far before you get into the real estate game.

With equity your credit score doesn’t have as much of an impact as it does with a home loan. You still have options if your credit is not perfect. If you score below 740 you should expect to pay more in interest, loan fees, and a lower LTV. This doesn’t mean you shouldn’t invest with a lower than 740 credit score, it’s just about what you need.

Lower LTV

20% learn it, love it, live it. That is the number that the bank will require from you as a down payment for your capital purchase. There are exceptions to 20% down, but that’s what most banks require.

20% is a lot of money, right? Yes I know, but the good news is you won’t have to pay the hospital bill! No one likes insurance money. The bad news is, this is only good news. Also 20% down is best, if you have piss poor credit expect the bank to want more or not even look at your deal at all. As a final note, plan to pay at least three months as cash savings. Savings are important, yes, eventually you will save 20%, but if you don’t have more than 20% in working capital for when the furnace comes out in the first month after then the bank will ask again to give you a loan. .

Home Hacking to get started

The idea behind home buying is simply to reduce or reduce your personal debt and use the spread (money you have saved) to invest in getting a rental property. Living in a nice house with an indoor pool and a movie theater is nice and all, but that house doesn’t make you a monthly income, it costs you a salary every month.

The main idea behind the “house hacking” concept is to simply rent out a part of your home to someone else, or share with someone as a roommate in your home. Alternatively it could mean selling your current residence and buying a multi-family property and living in one of the units while renting out the rest. Basically when it’s all said and done you’re renting what you already live in, to lower your monthly expenses to save capital for your dream of real estate!

If you haven’t bought your first home yet, or if you want to sell your current home to get into real estate, a multi-unit apartment might be right for you. By buying a multi-unit home you can live in one of the units and have your tenants pay all of your expenses this is generally more appealing to most people than having one. in their homes.

For example, if you buy 4 apartments, live in one apartment, and rent each apartment for $600 a month, that means you get $1800/month in rent. If your mortgage, escrow (taxes + insurance) utilities, and other expenses are only $1600 – you can pay $200/month just for the house. Even better when it comes time to move into your future home, you can rent out the 4th floor for even more money. Sound like a good idea?

Key Takeaway:

Investments have higher interest rates

Small loans are smaller than the credit score

You will need 20% for down payment (subject to availability)

Try house hacking to start building a house

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The Small Investor

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