A real estate is an attractive form of investment to many investors because of its renowned stability and consistent passive income. But the problem that most people face is transitioning from interested investor to property owner, which often boils down to finance.
Yes, real estate investment done right can be an excellent source of income. However, it can be an expensive venture to get started with. So in this article, we’ll be sharing some helpful financing tips for your next rental property purchase.
Tips For Buying Rental Property
Research your Financing Options
The key to better financing options lies in performing your due diligence and doing your research. There are many ways to finance a rental property purchase, and the only way to get the best deal is to explore your options. You can opt for more traditional options, such as paying cash upfront or seeking a loan from the bank or a private lender. Most investors’ knowledge is limited to these choices, but there are other options, such as using your primary house as leverage for a Home Equity Loan or as a line of credit.
You could also seek out seller financing or search for a good fixer-upper. Of course, this list of options isn’t exhaustive, and which choice is best for you will depend on several factors. So take out the time to carefully research your financing options.
Build a Good Credit Score
Most financing options, especially conventional loan options, require you to submit some official documents during your application process. One of the most critical documents in determining your eligibility is your credit report. It gives the lender or seller information about your spending habits and effectively tells them how trustworthy you are. A good score means you’re more likely to keep up with your monthly payments and gives you more leverage when negotiating.
Build habits that increase your credit score, such as paying your bills on time and not over utilizing your credit. However, if you find it difficult to maintain a good credit score because of some financial baggage in your history, you can consider other financing options.
Save for Your Down Payment
During your research, you might find that most financing options work in the form of a loan. When you seal a mortgage through a bank, they typically require that you pay at least 20% of the home’s value as a down payment. Although with other financing options, it could be less, it’s still better if you have the required funds.
You should have an idea of what type of rental property you’re targeting so you can start saving. Also, if you have the option and can spare the extra cash paying more than the required down payment, it sets you up as a serious buyer and decreases the amount you’ll have to cough out in the long run, thanks to the interest rate on your outstanding principal.
Create an Emergency Fund for the Unexpected
When making a budget for purchasing a rental property, don’t forget to factor in emergencies. Unforeseen circumstances like extra taxes, home renovations, and other bills can pop out of the blue. It’s always safer to have a safety net that can cushion the effect of such unexpected bills. Whatever money you have left over after completing your purchase can go into improving the property or financing your next one.
Find Off-Market Properties
The first place people begin searching for a house is online, and while investors have access to a myriad of listings on the internet, a lot of properties for sale never make it to the worldwide web. That means if you can’t seem to find a rental property that catches your fancy from a google search, it might be time to ask some more experienced real estate professionals. Agents, property managers, and other people in the field are more likely to know about great deals that are offline. The benefit of looking for off-market properties is that the terms are often more flexible, so you could secure a better deal than what you see online.
Negotiate your Closing Costs
From securing home insurance to hiring an appraiser, purchasing a rental property involves a lot of costs. Many new investors make the mistake of taking these costs at face value without bothering to bargain. The truth is you can negotiate with these professionals to get a better deal.
Also, if you’re going through seller financing, which allows more room for negotiation, you could ask the homeowner to take care of some of the costs, such as the title transfer or underwriting fees. You’ll find that a few dollars here and there could save you hundreds to thousands of dollars that you can reinvest.
Real estate can be an excellent investment if you approach it armed with the correct information about your options. But doing all the required research, or even what to look for, can be a challenging task itself. In that case, you can work with a professional who understands your local market before you make a purchase. That way, you’ll have extra help to guarantee that your income flow is regular.