- There’s money for investment properties, but bring a big down payment.
- With friendlier terms, a neighborhood bank might be a better fit.
- Don’t be shy. Ask for seller financing. It’s more common these days.
With some small improvements in the economy, many investors are starting to consider jumping into the residential real estate market again. And low prices make it a good time to do so.
According to figures from the National Association of Realtors, most metropolitan areas within the U.S. reported lower median sale prices on existing single-family homes during the second quarter of 2009 compared to the second quarter of 2008. Sales in Florida and California appeared to post some of the highest price drops, while prices on homes in the South, Midwest and Texas were less affected.
But while prices are good, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, there is some good news: A little creativity and preparation can bring loans within reach of many real estate investors.
“Investors are more scrutinized than they ever were, and financing is more difficult, but not impossible,” says Ben Spofford, an Ohio real estate investor and president of RealtyRTO.com.
If you’re ready to seek out financing for your residential investment property, these five tips can improve your chances of success.
Have a sizable down payment
Mortgage insurance won’t cover investment properties, so you need at least 20 percent down to secure traditional financing for them. If you can amass 25 percent, you may qualify for an even better interest rate, says Todd Huettner, a mortgage broker and president of Huettner Capital in Denver.
If you don’t have the down payment, you can try to obtain a second mortgage on the property, but it’s likely to be an uphill battle.
“I don’t know of any lenders doing second loans on investment residential right now,” Huettner says. Jumbo loans, which are used for financing more than $417,000, are also a rarity.
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, investors should check their credit score before attempting a deal. It will have the greatest impact on a loan’s terms.
“Below (a score of) 740, it can start to cost you additional money for the same interest rate. 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 two points to keep the same rate,” Huettner says.
The alternative to paying points if you score is below 740, obviously, is to pay a higher interest rate.
In addition, reserves in the bank to pay for all your expenses, personal and investment-related, for at least six months also have 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.”
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 large, nationwide financial institutions.
“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.
“You need a veteran mortgage broker that knows how to find investor money,” Spofford says.
Recommendations from friends also are a good way to vet lenders, and investors shouldn’t be afraid to inquire about their credentials, and then verify them. “What is their background?” Huettner says. “Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.”
Ask for owner financing
A request for owner financing used to make sellers suspicious of potential buyers, because almost anyone could qualify for a bank loan, Huettner says. But these days, it’s become more acceptable due to the credit crunch and the number of motivated sellers who want to get rid of their properties.
However, you should have a game plan if you decide to go this route. “You have to say, ‘I would like to do owner financing with this amount of money and these terms,'” Huettner says. “You have to sell the seller on owner financing, and on you. You need to present a picture to someone so they’re not filling in the gaps with their worst fears.”
Think outside the box
If you’re looking at a good property with a high chance of profit, consider securing a down payment or renovation money through home equity lines of credit, from credit cards or even from some life insurance policies, Spofford says. As always, research your investment thoroughly before turning to these riskier sources of cash.
Financing for the actual purchase of the property might be possible through private loans from peer-to-peer lending sites like Prosper.com and LendingClub.com, which connects investors with individual lenders.
Just be aware that you may be met with some skepticism, especially if you don’t have a long history of successful real estate investments. Some peer-to-peer groups also require your credit history to meet certain criteria.
“When you’re borrowing from a person as opposed to an entity, that person is generally going to be more conservative and more protective of giving their money to a stranger,” Spofford says.