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There’s inherent risk when it comes to nearly any kind of investing. Real estate is no exception. In fact, depending on your skills and experience, it could be even riskier. In addition to managing the property, an important part of investing in real estate is financing your initial purchase.
You have the option of a few financial paths to fund your investment property purchase.
A typical roadblock to getting an investment property is the need for a large down payment. Because investment properties aren’t covered by mortgage insurance, you could be required to lay down 20% of the purchase price or more.
You'll also be required to meet minimum credit history and income requirements. Typically a good credit score of at least 670 is required. To get more information, read our guide on mortgages.
Use these loans to tap into up to 85% of your existing home’s value to fund the purchase of your investment property. Home equity loans typically come with closing costs, though they average less than those of traditional mortgages.
Check out more about home equity loans and find out how to up your chances of approval.
In some cases, you can find properties that are rent to own. During the time you’re renting the property, you can save up for a down payment and bolster your creditworthiness.
Deciding not to buy the property won't harm your credit at all. But you will lose any fee or increased rent you put towards it.
If you’re short on a cash down payment, you may be able to partner with another person to get your property. It means a split in the profits, but it could lead to you getting your initial investment property sooner.
Less common, you can sometimes assume an existing mortgage, usually for a fee. To fully assume a mortgage at the rate the seller is paying, you’ll have to check if it has an Assumption Clause. This clause causes the full amount remaining on the mortgage to be due upon transfer. Meaning you’ll be stuck paying the entire amount at once, rather than taking over the same payments that the seller had.
Another lesser used type of financing is owner or seller financing. Rather than taking a mortgage out, you as the buyer enter into an agreement with the seller of the property. The two parties agree upon the term, interest rate and any other loan stipulations.
However, the seller must own the property outright or have a mortgage with a bank that agrees to the arrangement.
Here’s how to sort through your many available options to find one best suited for you.
Financing options for a vacation rental are the same as financing for other investment properties. If you decide to get a mortgage, you’ll likely need to provide proof that it’s going to be used as a vacation rental home. Mortgages lenders will usually ask for proof of income that you can support the monthly payments in addition to any other mortgages and debts you have.
What’s important to consider when investing in a vacation rental is that there may be an off-season depending on where the home is located.
You'll want a few standard documents on hand when applying for a mortgage:
Before you go for financing, follow these four tips:
Researching the best investment properties for your situation can take a lot of research. Build your knowledge before signing any new mortgages or committing to other financing options. You may want to fully calculate your potential expenses and compare them against your predicted returns before signing a contract.
Need a loan for other business expenses? Use our guide to compare more financing options.
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