There are lots of financing options available to real estate investors – but what’s the best way to secure a loan? Should you use a broker or a direct lender? And most importantly, what special circumstances do you need to consider and be prepared for as you research funding options? Use these three tips to help guide your financing decisions.
You can seek out investor friendly lenders:
Unfortunately, not all lenders are created equal when it comes to giving investment advice. Real estate investors are dealing with a lot of different factors that don’t come into play with traditional lending. For example, individual homeowners typically aren’t juggling multiple homes, tenants and repayment on multiple loan types. But for an investor, that’s just daily life.
There are two types of people who can help you secure financing; brokers and direct lenders. The main difference between the two is a broker shops around to find you the best deal amount his network of lenders, where as a direct lender is the institution actually giving you the money.
Many mortgage brokers are very well versed in traditional lending, but don’t have a clue how to help an investor intelligently finance a portfolio to achieve long-term monetary goals. A direct lender can be a better choice for investors seeking financing, but that’s not always the case. The bottom line is, you need to do some research to pinpoint a lender who focuses specifically on managing investor accounts for best results. Not doing so can quickly result in frustration for all parties involved.
You need to be prepared to go to great lengths to prove your income:
Typically, investors seeking multiple loans have to provide two years worth of tax documents to prove income stability. If you have a standard employer job and can produce W2s, that’s easy enough. If you’re self employed, it can be a little more complicated.
Make sure you have easy access to your tax returns and profit and loss statements (PNLs). In some cases, lenders will even ask for a letter from your CPA to get more skin in the game to confirm your tax returns are accurate. Get your ducks in a row ahead of time and be prepared to provide all the information needed to allow lenders to make sure you’re a safe bet.
There are special considerations you need to know for investors with multiple loans:
Here are three of the most commonly experienced multiple loan situations:
- Qualifying credit checks become more aggressive after you’ve financed four properties, meaning you have to have better credit to qualify for a loan.
- Lenders can require cash reserves, aka cash money in the bank to cover mortgage payments. If you own a personal property and you want to acquire a rental, you may be asked to provide proof that you have enough cash saved up to cover six months of mortgage payments for both properties before your loan can be approved. Stock your savings to make sure you’re prepared!
- Guidelines for mandatory down payments change after you’ve purchased a certain number of properties. For example, you may only have to put 20% down for loans on the first four single family properties you purchase. However, if you purchase five or more homes, you may be asked to put down 25% up front.
Have an lender who knows investing on standby, be prepared with enough savings and make sure you’ve got all your paperwork in order to simplify the process securing funding for all your projects.