Real estate investments have the potential to provide a steady income for investors—presuming they can get their hands on the financing required to get in the game. There are many financing options available, and the primary differences boil down to how much the loan is going to cost the investor. The higher the cost of the loan, the lower the long-term income potential of the investment. If you want to maximize the profitability of your venture, getting the best mortgage is critical. Here’s what you need to know to get the best loan possible.
1. Tidy Up Your Credit
A credit score in the mid 600s may be enough to qualify for a basic investment loan, but the terms will not be on the investor’s side. With low credit scores come high down payments and high interest rates, neither of which will help your profitability. The higher your credit score, the better the terms of the loan—and a score over 740 will typically qualify borrowers for the best terms available from most lenders.
2. Organize Your Financial Documentation
Most lenders want to see that you have either the income or the available cash to cover your existing obligations and the new loan you’re trying to secure. You’ll be allowed to count a certain portion of the investment property’s income in your application, but having the right documentation to show the rest of your income and cash reserves will speed up the process. Gather your tax returns from the last two years, including W-2s, 1099s, and other income statements, along with bank statements, recent pay stubs, and anything else relating to your current income—especially if you have new sources of income that are not on previous tax returns.
3. Reduce Current Debts
Most lenders consider your debt-to-income ratio to make sure you’re not using all your current income to pay obligations and have nothing to spend on food and the electric bill. If you’re unable to boost your income levels, paying down debts is the way to go. For borrowers who already meet the minimum requirements for a lender, reducing that ratio can help you get better terms for your loan.
4. Document the Property’s Cash Flow
Most lenders are primarily concerned with your ability to repay a loan. Some lean heavily on your personal ability to pay, as demonstrated by your past (i.e., your credit score) and your current income levels. Others, called asset-based lenders, will be satisfied with a property that can demonstrate a high debt service coverage ratio, or the ratio of the projected income of the property to the total amount of the mortgage payments, taxes, and insurance. In essence, the more income that remains once the debts have been paid, the higher the score; the higher the score, the better the terms of the loan.
5. Cast a Wide Net
From an outside perspective, it may seem like most lenders are the same and that loans do not vary considerably from one lender to the next. The truth is that there can be significant differences from lender to lender. First, the fees associated with the mortgage will vary, and even a fraction of a percent difference in interest rates will have a major impact on the long-term cost of your loan. Borrowers should take the time to apply to several lenders and include conventional lenders as well as asset-based lenders so they can compare and contrast their options.
Protecting Your Investment
Once you’ve done the hard work of finding the best loan for your investment property, the next step is to maximize the profits from that investment. Many first-time investors are overwhelmed with the day-to-day operation of rental properties, especially if there are multiple units and many tenants to juggle. It can be easy to make costly mistakes in the initial months, especially if your property has vacancies, and you don’t have the marketing skills to attract tenants or the screening skills to choose the right one. New investors may find that working with an experienced property management company will help ensure the venture gets off to the best possible start to provide long-term income and security.