How to Finance Your First Investment Property

  • September 21, 2022
  •   •  
  • 5 min. read time
mortgage blog, finance an investment property, preferred rate

Investing in real estate could help you establish financial security and grow your wealth, even when mortgage rates are rising. Choosing to invest in a second property might seem counter-intuitive as mortgage rates rise. However, adjustable-rate mortgages and shorter-term home loans could help you get a lower mortgage rate, and make a second property worth the investment. Especially if you’re thinking about flipping a property or owning a second property for less than 5 years. It’s worth it to discover your options.

That said, deciding how to finance an investment property can be a difficult decision. So if you’re thinking about buying an investment property, or even a vacation home, this article is a great place to start. Especially if this is your first time investing in real estate beyond your primary residence. Doing a bit of homework will help clarify the risks and outline the benefits before you jump in.

These 5 smart steps will help get you started.

If you’re ready to take action, connect with a local mortgage advisor to talk through your strongest mortgage options.

5 Steps to Finance Your First Investment Property

1. Decide on the right type of investment property.

This might seem obvious, but first things first: Think about what type of property you want to own as an investment. In the midst of inflation, financing an investment property could provide a second source of income or help diversify your investments.

For example, would you love to restore a home for 2-3 years and then sell it at a profit? Would you like to generate passive income from a rental unit? Have you dreamed about powering through a fix-and-flip property in less than six months? Or maybe you envision buying a fourplex and living in one of the units while you rent the other units to cover the mortgage.

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Deciding which path to take will directly impact how you choose to finance an investment property. Mortgage lenders have varying criteria based on the type of investment property you decide to finance. As a result, documentation requirements and qualifications can vary drastically. 

Connecting with a local mortgage advisor can help you decide which path meets your vision and financial goals.

2. Build a strong borrower profile.

Your credit score is often the most influential factor in determining your interest rate and financing terms. Financing your next investment property is no different. Every lender decides how to alleviate risk. Your credit report is one way to demonstrate your financial strength and dependability. 

The next factor is your debt-to-income ratio. Before financing an investment property, it’s important to pay down consumer debt or credit cards and loan payments that impact your cash flow.

Finally, monitor your credit report and fix any errors or misinformation. 

Download a free copy of your credit report to find out your credit score here.

Related: How to boost your credit score in less than 60 days

3. Prepare to make a substantial down payment toward the investment property.

Most lenders require a down payment of at least 20% to finance an investment property. Some lenders require at least 30%. In general, the larger your down payment, the better loan terms you’ll be able to secure toward financing your new property.

Homeowners with substantial equity in a primary residence often consider refinancing their mortgage and using the cash as a down payment for an investment property. For other homeowners, choosing finance terms that allow the use of gifted funds is a better option.

As a matter of fact, there are a number of custom loan options that can help you meet both your investment goals and real estate dreams. 

Discuss your goals with an experienced mortgage advisor early in the process to help determine your best financing options for an investment property. The strongest path will give you the best loan terms–financing that saves you money and builds your wealth.

4. Understand your financing options for an investment property.

What loans are available for homeowners who want to finance an investment property? The truth is, there are a number of options available, and custom loans often deliver the best loan terms.

For homeowners with substantial equity in their current home and able to extend their credit, applying for a home equity line of credit or a home equity loan may be a viable option. There are limitations on the amount you’ll be able to borrow, and your current residence would be used as collateral for the new investment property. For this reason, some borrowers want to finance an investment property as a separate transaction from their primary residence.

Conventional loans offer the greatest flexibility for many borrowers. However, since the new property will most likely not be your primary residence, you may hit a few obstacles and additional fees such as mortgage insurance and higher mortgage rates. Working with a mortgage advisor can clarify which paths offer the best financing for an investment property.

Finally, personal loans and hard money loans are an option for borrowers who may not be able to secure financing through standard outlets. Beware that these types of lending options often come at a high cost, with high-interest rates, pre-payment penalties, and additional costs baked into the loan. 

5. Partner with a local mortgage advisor

There are three main types of lenders to consider to finance an investment property for the first time: Big banks, mortgage lenders, and private lenders.

Big banks are worth considering if you already experience investing in real estate. However, big banks offer less flexibility. To take advantage of a streamlined process with a big bank, you’ll need a strong borrower profile and a large down payment ready.

In contrast, private lenders typically offer greater flexibility and less restrictive criteria to qualify. However, interest rates are often much higher with private lenders and loan terms are not always favorable. Private lenders are often willing to carry greater risk in exchange for a higher return, so that cost gets pushed onto you, the borrower.

Partnering with a local mortgage advisor can offer the best of both worlds. A local mortgage advisor is often extremely knowledgeable in the local real estate market, current home values, trends and risks. In addition, an experienced mortgage advisor can leverage lender partnerships so that you get the best financing and the lowest mortgage rates available.

A local mortgage advisor can also help you put together a borrower profile that best matches the financing criteria for the investment property you want to buy.

Taking Action

One of the best ways to diversify your portfolio, build wealth, and even fight inflation is to invest in real estate. Deciding how to finance an investment property for the first time is often a tough decision and one of the biggest financial decisions many homeowners make. If you’re ready to consider an investment property, take the next step and talk directly with a local mortgage advisor.

We can guide you through the process and help you understand your financing options more clearly. Different types of properties require different types of loans, and it can save time and money to discuss your long-term financial goals early in the process. Give us a call or send a direct message here. We’d love to help.

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THE DEPARTMENT MAINTAINS A RECOVERY FUND TO MAKE PAYMENTS OF CERTAIN ACTUAL OUT OF POCKET DAMAGES SUSTAINED BY BORROWERS CAUSED BY ACTS OF LICENSED RESIDENTIALMORTGAGE LOAN ORIGINATORS. A WRITTEN APPLICATION FOR REIMBURSEMENT FROM THE RECOVERY FUND MUST BE FILED WITH AND INVESTIGATED BY THE DEPARTMENT PRIOR TO THE PAYMENT OF A CLAIM. FOR MORE INFORMATION ABOUT THE RECOVERY FUND, PLEASE CONSULT THE DEPARTMENT'S WEBSITE AT WWW.SML.TEXAS.GOV