Tips for Financing the Purchase of an Investment Property

By | June 27, 2016

canstockphoto7295829Property investment is a popular way of building up a nest egg for retirement. Pensions still rule, but in recent years many people with an eye on retirement have chosen to buy properties with their surplus income. It isn’t the right decision for everyone, but if you are fed up with abysmal savings account rates and you would like to generate an income as well as see your capital grow, property can be a smart investment. So what is the best way to fund your purchase?

Mortgage Finance

Mortgage finance is the most common way to fund the purchase of an investment property. Traditional mortgages are not suitable for investment properties, but many lenders now offer mortgage products for buy to let investors, so look at refinance rates in NJ or approach your lender for an informal chat about releasing equity from your existing property or taking out a new deal.

One thing to remember is that it is not easy to secure funding these days. Most lenders had their fingers badly burned when the sub-prime property market crashed, so the days of quick and easy lending are long gone. These days, you need to have an excellent credit rating and a fairly large down payment if you want a lender to consider you for mortgage finance. Ideally have at least 25% of the property value as your deposit, but more is better.

Tap Into Equity

If you own your home outright or have very little mortgage left, you can tap into the equity and use this to finance an investment property.

Hard Money Loans

Hard money loans are a bit different to regular mortgages. Sometimes known as fix-and-flip loans, hard money loans are short-term lending for buyers who want to sell a property on quickly. This allows buyers to invest in a below market value home that needs some work, do it up, and sell it on for a profit. As long as the lender believes the property to be a profitable one, they will agree to the loan.

This type of lending is useful if you are not interested in a long-term investment, but be aware that fees associated with hard money loans are higher.

Check Your Credit

Check your credit report before you approach any mortgage lenders. If there are any mistakes on your credit report, it will jeopardize any application you make. Mistakes can usually be rectified, but it will take time. The better your credit report is, the easier it is to find a lender willing to hand over money at a favorable rate.

Interest Rates

The advertised rate of interest is not always what the lender offers. They take a number of variables into account when deciding on your risk status, including credit history, what the property is worth, and how much you want to borrow. If the bank views you as a risky proposition, it may still lend you money, but at a higher rate of interest.

Don’t always assume that large lenders offer the most favorable interest rates for loans on investment properties. An underwriter working for a smaller bank will take a more personal approach to lending and instead of ticking boxes on a screen, he or she will evaluate your application on its individual merits. This can make it easier to borrow money if there is anything unusual about your application, such as your age or your income.

Term Life Insurance

Cashing in a life insurance policy is another way to fund an investment property purchase. If the policy is not large, it could still give you a sizable down payment on the purchase, which means you don’t need to dip into your savings. However, check the small print first, as there may be a penalty for cashing in the policy early.

Cash Buyer

Buying property for cash is less risky than taking out mortgage finance. Interest rates are very low right now, so money squirreled away in a savings account doesn’t work very hard. You could invest your savings in high interest bonds or take a punt on the FOREX markets, but investing in property is low risk and you stand a very good chance of achieving a good return in the long-term.

The one thing to be wary of if you use up your savings is that once your money is tied up in property, you won’t be able to access it easily. If you have plenty of money, this should not be a problem, but never leave yourself short, as property is expensive to maintain.

Investment properties make useful nest eggs for retirement, but consider your options carefully and always take professional advice before you buy.