Home prices have been on a steady climb from the depths of the housing crash, leaving many wondering if it is still a good time to invest in the residential real estate market.
According to the National Association of Realtors, or NAR, 85% of major metro areas saw gains in existing, single-family home prices in the first quarter of 2015, while 14% saw a price decline.
However, low interest rates are still attracting buyers, according to the NAR, and limited inventory is behind escalating prices in some desirable areas. The NAR predicts continued steady growth in most of the country.
But while interest rates remain low, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, there is some good news: A little creativity and preparation can bring loans within reach of many real estate investors.
If you’re ready to seek out financing for your residential investment property, these five tips can improve your chances of success.
Have a sizable down payment
Mortgage insurance won’t cover investment properties, so you need at least 20% down to secure traditional financing for them. If you can put down 25%, you may qualify for an even better interest rate, says Todd Huettner, a mortgage broker and president of Huettner Capital in Denver.
If you don’t have the down payment, you can try to obtain a second mortgage on the property, but it’s likely to be an uphill battle.
Be a ‘strong borrower’
Although many factors — among them the loan-to-value ratio and the policies of the lender you’re dealing with — can influence the terms of a loan on an investment property, investors should check their credit score before attempting a deal. It will have the greatest impact on a loan’s terms.
“Below (a score of) 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate,” Huettner says.
The alternative to paying points if your score is below 740, obviously, is to pay a higher interest rate.
In addition, reserves in the bank to pay for all your expenses, personal and investment-related, for at least six months also have become part of the lending equation.
“If you have multiple rental properties, (lenders) now want reserves for each property,” Huettner says. “That way, if you have vacancies, you’re not dead.”