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Fundamentals of financing an investment property

You have big dreams about owning a property and retiring young. They just don’t have the cash to buy the real estate in cash (neither do most of us). This leads you on the way of financing with your house bank. Perhaps you already own a home and have gone through mortgage approval and signing. That should be easy then, right? Wrong, investment home loans are not like your traditional home loan.

Lenders are stricter when it comes to subscribing to investment property than they are to a private mortgage. You may be wondering, but why? Quite simply, if you own investment property and a personal home and then lose your job or things go south financially, at worst, you will pay your personal mortgage before anything else. You won’t default on your mortgage because that’s where you live!

interest rate

The interest rate will be higher than that of your mortgage loan, just like that. Add 1-3 percentage points more than the home loan rate. That is, if a lender charges 4.00% interest on home loans, you are likely to pay 5-7% interest on investment loans. That’s how it works folks. The loans are riskier, so the banks want more for them.

credit-worthiness

As with any type of loan, your credit rating is important. It shows the bank a history of your previous credit experience and basically tells why you should or shouldn’t get a loan. Working to make sure your credit is top notch is something you need to do long before you get into the real estate game.

With investment property, your creditworthiness does not have as much of an impact as it does with mortgage loans. You still have options if your credit is not perfect. If your score is below 740, expect to pay more interest, lender fees, and lower LTVs. This doesn’t mean you shouldn’t invest with a credit score less than 740, it just states what to expect.

Lower LTV

20% learn it, love it, live it. This is the number the bank will ask you as a down payment for your property purchase. There are, of course, exceptions to the 20% cut, but that’s what most banks ask for.

20% is a lot of money, isn’t it? Yes I know, but the good news is you don’t have to pay for mortgage insurance! Nobody likes mortgage insurance. The bad news is this is the only good news. Also the 20% less is the best case scenario, if you have bad credit, expect the bank to expect more or not even look at your business. As a final note, plan for at least three monthly payments as a liquid cash reserve. Cash reserve is important, yes, you may have finally saved that 20%, but if you don’t have more than the 20% working capital in the first month when the stove goes out in the first month, the bank will question lending again.

House hacking to start with

The idea behind house hacking is simply to cut or minimize your own expenses and use the spread (money you save) to invest in buying properties to rent. Living in a lovely home with an indoor pool and movie room is great and all, but this home doesn’t bring you monthly cash flow, it costs you monthly cash flow.

The main idea behind this “house hacking” mentality is to simply rent part of your house to someone else, or to live with someone else as a roommate in your own home. It could also mean selling your primary residence now and buying an apartment building and living in one of the units while renting out the rest. Basically when all is said and done, rent what you already live in to cut your monthly expenses in order to save capital for your dreams of real estate glory!

If you don’t have to buy your first home yet, or want to sell your home now to get into real estate, an apartment building might be the one for you. When you buy an apartment building, you can live in one of the units and let your tenants pay for all of your expenses. This is usually more attractive to most people than having someone living in their home.

For example, if you buy a 4 unit, live in one unit, and rent each of the other units for $ 600 per month, that would mean you are making $ 1800 per month in rent. If your loan, escrow (tax + insurance) utilities, and other expenses are only $ 1,600, you could be getting $ 200 a month just to live in the house. Even better, when it comes to moving into your future home, you can rent out the fourth unit for even more income. Sounds like a great idea, doesn’t it?

Key to take away:

Investment properties have higher interest rates

Lenders are a little more lenient with creditworthiness

You need 20% for the deposit (exceptions are possible)

To start with real estate, try house hacking

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America’s darling,

The little time investor

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Source by Ryan Curtis