Home prices have been on a steady climb from the depths of the housing crash, leaving many wondering if it is still a good time to invest in the residential real estate market.
According to the National Association of Realtors, or NAR, 85% of major metro areas saw gains in existing, single-family home prices in the first quarter of 2015, while 14% saw a price decline.
However, low interest rates are still attracting buyers, according to the NAR, and limited inventory is behind escalating prices in some desirable areas. The NAR predicts continued steady growth in most of the country.
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But while interest rates remain low, 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.
If you’re ready to seek out financing for your residential investment property, these five tips can improve your chances of success.
Mortgage insurance won’t cover investment properties, so you need at least 20% down to secure traditional financing for them. If you can put down 25%, 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.
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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.
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“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 2 points to keep the same rate,” Huettner says.
The alternative to paying points if your 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.”
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.
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 asks. “Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.”
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 tightening of credit.
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.”
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, says Ben Spofford, an Ohio home remodeler and former real estate investor. 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.
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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.