If you are an aspiring investor who is looking to generate more income, then you probably know that investing in real estate can be a great option. Buying investment property of any kind can provide you with plenty of benefits, including steady cash flow, long-term security, and even protection against inflation.
However, getting started with real estate investments can be a bit challenging, especially if you are a first-time investor.
The whole process requires extensive knowledge, time, and money in order to reap all the benefits investing in real estate offers. Probably the hardest part of it all is figuring out how to finance your investment property.
The good news is with a little bit of research and a few effective strategies, you can purchase your first property fast and hassle-free. To get you started, we outline four tips to help you finance your first investment property.
Explore the different types of loans
There is no going around it—buying an investment property is not cheap. As a first-time investor, you will most likely need to take out a loan to make your purchase. Luckily, there are several types of investment property loans available, each having its own requirements and suiting different types of investors.
For example, a debt-service coverage ratio (DSCR) loan is a type of investment property loan best suited for investors who want to qualify for a loan based on the income generated by their investment property rather than providing employment information, tax returns, W2s, etc.
DSCR loans are a great option for first-time and experienced real estate investors alike because they have faster application and closure times and they enable you to commit to multiple properties simultaneously.
Other types of loans you can explore are conventional loans, private money loans, and seller financing.
Maintain a good credit score
Maintaining a good credit score can also help you finance your first investment property. If you go through a bank, your credit score will have a major influence on the loan’s terms. So, you’ll want to make sure that your credit score is good enough to get you a low-interest rate.
To achieve that, make sure you monitor your credit score regularly, pay all of your bills on time, and handle any errors as soon as possible. Additionally, make an effort to keep your credit card balances at or below 30% of your credit limit.
Use your own home equity
Another useful tip you can consider to finance your investment property is to use your home equity. This is a great option for those who own their current home or have a significant amount of equity that they can use to make their real estate purchase.
In general, there are three ways you can do this: cash-out refinance, home equity loan, and home equity line of credit (HELOC).
- With a cash-out refinance, you can draw upon your equity, replace your old mortgage, or start a new one if you own your home.
- With a home equity loan, you will have to leave some equity in your existing property, maintain good credit, and provide proof of sufficient income to repay the loan.
- Since the value of your home equity serves as the security for the HELOC, lenders may be more inclined to offer lower interest rates than they would for other types of loans.
Find an investment partner
As a first-time investor, it may also be useful to look for an investment partner to help you make your real estate purchase.
This should be someone who already has experience in the industry so they can navigate you through the process and help you get started on your investment journey with ease.
To find your partner, there are several ways you can go about it. For example, you could attend local events where seasoned investors gather so you can find someone who has the money to invest in real estate, knows how to manage it, and is interested in investing.
Another great resource to connect with trustworthy investors is to talk with real estate agents and brokers who will point you in the right direction.
Final thoughts
Although investing in real estate can be a risky venture, it still offers the potential for a big payoff if done correctly. The hardest part of it all may be figuring out how to finance your investment property, but with the right strategies you can make the right decisions and reap all the benefits this type of investment offers.
For more help, refer to our post and follow the tips on how to finance your first real estate property.