If you’re thinking about diving headfirst into the investment property market, you’re not alone. According to the National Association of Realtors, in 2016, a whopping 30% of all home sales were purchased by people looking for vacation homes or rental properties. Most buyers opted for properties in suburban or urban areas that were an average of 20 miles from their primary residence. Needless to say, financing multiple investment properties is a hot topic these days.
Real estate investments are a great way to diversify your investment strategy beyond the often-bumpy stock market. When you’ve found an area that’s hot or is reaping huge returns on a property you already own, the next step is to snatch up more. Whether you plan to purchase numerous properties in one city or invest in multiple cities, it’s important to educate yourself on which properties will give you the best bang for your investment buck.
In addition to this, you’ll need to develop a strategy for financing multiple investment properties. Here are three things to know as you put together your plan.
If this is your first foray into purchasing rental property, it may come as a surprise that lenders are quite a bit more cautious when it comes to rental properties than they are if you’re purchasing a residence. Because of this, you won’t be eligible for certain loan products (USDA or FHA loans, for example) that would be eligible were you purchasing a residential property.
Stellar credit is a plus, of course. For investors purchasing four or fewer properties, for example, a FICO score of 630 provides a solid position. You’ll also need to be prepared to put down 20% as a down payment and will need to have liquid financial reserves that are equal to three months’ total mortgage payments for the properties you’re purchasing.
You’ll also typically be expected to put down 20% as a down payment. In addition to this, if you don’t own any other rental properties, you’ll need to use your non-rental income to qualify for a loan. If you already have experience in the rental world, you must have at least two years of history to prove your expected rental income.
Lenders will do detailed due diligence into your tax returns and income. They’ll look at the monthly mortgage on your primary residence. Your debt-to-income ratio will also come into play, and it’s important to know that these numbers shift with each property you add into the equation, as each property will have its own individual set of mortgage documents.
When it comes to financing multiple investment properties, savvy investors know that the process will be much smoother if they can deal with a smaller bank. This is because smaller institutions need the business more than the larger power players. They’re also more likely to be flexible in their terms, while larger banks will be more cautious.
Working with a smaller bank is only likely if you’re financing a few investment properties. Once the number jumps, you’re going to have to deal with big bank portfolio lenders who are going to be especially choosy in terms of who they lend to.
As you work towards financing multiple real estate properties, working with a real estate investment firm can help make the process a success. Their extensive experience and knowledge about properties, financing, and the many types of lenders available can help streamline investment projects and put you on the path to a prosperous portfolio.