Last modified on November 5th, 2013
By Aimee Miller
Interest rates are still at historic lows and property values continue to be depressed. However, recent actions of the Fed and growing seller demand appear to be forcing an increase in both. Those trends might not be reversing any time soon, so now might be the right time to invest in another rental property. A key focus when expanding your asset property base will be securing a mortgage. These are a few issues to keep in mind when financing a rental property.
Before applying for financing, make sure your credit is in order. Check your business credit reports to make sure they are accurate. Quickly work with the credit bureaus to make any necessary corrections. If your business credit rating is over 75, your business is in good shape. Less than that and you’ll likely have to pay an additional fee to hold the prevailing interest rate. Lenders will also want to confirm that you can cover expenses on all your properties for at least half a year.
The less you have to borrow relative to the value of your investment property, the better chance you have to obtain the necessary financing. Most lenders now require a 20% minimum down, but some may want 25%-30%. If you don’t have cash on hand, consider drawing on equity from your other properties to fund the down payment.
If you’re not an “ideal borrower” in relation to your down payment or expense coverage look to local banks rather than to the large national lenders. These smaller institutions know the local market and are more interested in investing in local properties as part of their charter. If you have a history of investing in rental properties in the community, you are more likely to be considered a solid investment customer for these local lenders.
Mortgage brokers can sometimes be more flexible than commercial banks since they are focused specifically on financing properties and normally use many types of lending products. Find a long-term mortgage broker who will likely have more access to a deeper pool of investors.
If your business can’t qualify by itself for the purchase of a specific property, consider looking for an investment partner to split the costs. Your combined resources may help you secure the financing you need.
While the days of easy financing have long since passed, with research and flexibility you can still find a way to obtain the mortgage you need to finance a rental
I would also recommend trying to buy an existing property with an established tenant. Local banks will be more likely to lend if the property has a history of cash flow and the property can support the proposed debt service regardless of borrower strength.