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5 Tips for Financing Your Investment Property

HomeTech5 Tips for Financing Your Investment Property

If you’re a first-time property investor, you know how overwhelming it can feel.

There are decisions to make regarding lenders, down payments, interest rates, and more.

However, experiencing the process of financing a property is the best way to learn and prepare for your next one.

Your first investment property might not be the largest or the most profitable, but what you learn while financing it will help you achieve bigger and better deals in the future.

Here are five tips for financing your investment property.

1. Make a Sufficient Down Payment

One of the decisions you’ll need to make about your loan is the size of the down payment.

Traditionally, down payments ranging from 15% to 20% of the total mortgage are successful at securing loans. However, some lenders will be satisfied with a much smaller down payment.

The higher down payment you can make, the lower interest rates, or annual percentage rate (APR) you can lock in. This is because investing more cash in your property from the start means you have more equity in the home and are therefore a more trustworthy borrower.

On the other hand, a small down payment makes your loan risker for your lender, who might charge higher interest rates to compensate.

Sizable down payments are especially important for adjustable-rate mortgages (ARMs), whose rates can increase as the loan ages.

2. Consider Your Monthly Expenses

Before you decide on a down payment amount, you should also consider your monthly expenses.

How much cash do you need accessible every month to cover various property expenses? These expenses could include:

  • Property taxes
  • Landlord insurance
  • Repairs and maintenance
  • Paid advertising
  • Tenant screening costs
  • Utilities
  • Employee compensation
  • Property management software fees
  • Vacancies and tenant turnover

Consider how much money you need available on a day-to-day basis for each of these categories. If you attempt to take on too large a down payment, you could restrict your monthly budget so much that your properties become uninhabitable, effectively cutting off your cash flow.

While you should try to build as much equity in your home as you can, small steady payments can achieve the same goal without limiting your business’s monthly operations.

3. Use an Online Mortgage Calculator

If mortgage types, loan durations, interest rates, and down payments are a little too much to calculate in your head, consider using a mortgage calculator.

Mortgage calculators allow you to enter all the key information about a potential loan and compare it to another loan you’re considering. You can calculate your potential monthly mortgage payment, total interest charged over the loan’s life, or the amount you should expect to put down.

You can find mortgage calculators on sites including BiggerPockets, Innago, Investopedia, and NerdWallet.

4. Aim for a High LTV Ratio

The Loan-to-Value Ratio, or LTV, is a metric used by lenders to measure borrower risk. LTV is the ratio of the loan amount remaining after your down payment to the appraised property value.

Lower LTV typical results in lower interest rates and fewer fees. High LTV means you’ll pay more in interest over the loan’s duration and are likely to be responsible for additional fees. A ratio greater than 80% might require you to pay for personal mortgage insurance (PMI).

How do you lower your LTV? The most direct way is to make a larger down payment. A higher appraisal with the same down payment percentage will also result in a low LTV.

5. Refinance with the BRRRR Method

The BRRRR method is a popular real estate investing strategy.

Each letter in the acronym stands for a step in the real estate investing process:

Buy – Purchase a property at below-market price.

Rehab – Increase the value of the property by making improvements that contribute more value than they cost. Often this means adding bedrooms or remodeling kitchens and bathrooms.

Rent – Rent out your property to trusted tenants.

Refinance – Secure a new loan to refinance your property. Because you added value while rehabbing, your appraised value should be higher than the amount of your initial investment. Borrow on this appraised value for lower interest rates.

Repeat – Continue building your investment portfolio using the BRRRR method.

The BRRRR method relies on your ability to rehab a property substantially enough that its appraised value increases. You also need the financial know-how to secure deals during the rehabbing step. Otherwise, your rehab costs could exceed the value they add and leave you hurting for cash to cover property expenses and make future down payments.

Conclusion

Finding a lender and loan for your property is the first step toward passive income and eventual financial freedom. By following the above tips and learning as much as you can about real estate investing, you’ll be well-equipped to secure your first property and others beyond.

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