There’s no question that mortgage financing is a big part of your business if you’re a real estate investor. Because of this, it’s important to maintain your financial profile so that you can easily qualify for financing and take advantage of the best terms you can.
As a mortgage consultant and real estate investor, there are some common stumbling blocks I see that hinder investors from getting the financing they need. The following are some important investment property finance tips to keep in mind as you build your business.
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5 Investment Property Finance Tips to Help You Get the Financing You Need
1. Maintain your credit.
Having good credit scores is not a prerequisite for being a successful real estate investor, but it certainly can help. If your goal is to acquire long-term buy and hold properties, chances are you’re going to need traditional bank financing at some point. Traditional banks place a lot of weight on credit scores, so it’s important to regularly monitor your credit, make all payments on time, and take care of any errors or inaccuracies promptly.
Also, be careful not to over-utilize your credit. If your credit card balances are more than 30% of your credit limit, it can hurt your credit scores.
2. Consider the Delayed Financing program.
Previously, Fannie Mae did not allow you to do a cash-out loan on a property until you’d owned it at least six months. With the introduction of the Delayed Financing program in mid-2011, Fannie Mae began offering real estate investors and home buyers the ability to do a cash-out refinance on your home and recapture the assets used to make the purchase within 24 hours of closing.
3. Maintain adequate reserve funds.
It’s never a good idea to stretch yourself too thin financially as a real estate investor because you can always expect that the unexpected eventually will happen. However, having adequate reserves is also important when qualifying for financing. Hard money lenders and traditional banks like to see that you have the money to do the deal and cover the unforeseen should it arise. Hard money guidelines vary depending on the lender, but if you’re working with a traditional bank, be prepared to document up to six months’ worth of payments in reserve for each financed residential investment property you have.
4. Make your money when you buy.
A lot of investors got into heaps of trouble speculating on rising home values during the housing boom when the market turned against them. Folks, this is not investing; this is hoping the market will throw you a bone. Sure, some people got lucky, but this kind of strategy (or is it gambling?) probably isn’t going to work in today’s market.
It’s important that you structure your deals so that your profits are built in when you buy. In other words, buy your rehab deals with enough margin that you can make money even if an unexpected expense arises. Buy your rentals based on current, realistic expenses and cash flow, not what they might be at some point in the future. Building your profits into your deals when you buy will make it far easier to obtain the financing you need to get the deal done.
5. Have multiple exit strategies.
A traditional bank won’t necessarily care if you have more than one exit strategy, but a hard money lender probably will. Hard money lenders lend on a short-term basis, and they like to see that you have a contingency plan for repaying them in case your plan “A” doesn’t pan out the way you expected. Structuring your deals so you have more than one exit strategy will greatly help you when you’re asking for money to finance the deal.
Again, just to recap, keep an eyeball on your credit and maintain a good reserve account so that you’re a financially strong borrower. Secondly, structure your deals with multiple exits and build your profits in when you buy instead of waiting on the market to make your money for you. And finally, consider using the Delayed Financing program to recapture assets within 24 hours of purchase.
Any tips you’d add to this list?
Let me know with a comment!