5 Tips For Buying An Investment Property

Successfully buying an investment property is real work, but with research, patience and enough capital to finance the deal, you can significantly increase your wealth over time.

Nov 14, 2014

Most people lean too far one way or the other on investing in real estate – many think that it will be too hard for them, while others think that it will be far easier than it actually is.

Have a Large Down Payment

Unfortunately, investing in real estate is not something that can be done with pocket change. Because mortgage insurance doesn’t cover investment properties, you will generally have to have a down payment of at least 20 percent to secure traditional financing.

If you can amass this level of savings, it may be preferable to wait just a little bit longer in order to bring a 25 percent or 30 percent down payment to the table. This could qualify you for better terms, meaning that you will save money and recognize returns sooner.

Consider Owner-Occupied Buying

If you are willing to live in the property that you are buying for a year or more, you may be able to purchase with a lower interest rate or down payment. In particular, properties approved by the U.S. Department of Housing and Urban Development or the Department of Veterans Affairs can receive favorable terms. After one year is up, you are free to purchase another home and sell the one that you were living in. While this may be stressful, especially with children, you are free to repeat it as many times as you like.

Think Local

If coming up with a down payment large enough to qualify you for favorable term is difficult, consider local banks and credit unions. While large banks aren’t particularly concerned with your individual circumstances, banks focused on the community may be more flexible and interested in investing locally. They may also have insights about the areas in which you want to invest that could be useful to you.

Have a Good Credit Score

Your credit score is one of the most important factors as to the loan terms that will be available to you. Generally, if your score is below 740, you will either have to pay points to receive the same interest rate or accept a higher one. This can seriously affect the return on investment that you will see from your investment property. If you have a low credit score, you may wish to consider taking some time to improve it before investing.

Another factor to consider is the level of cash reserves that you have. Banks know that properties sometimes have difficulty finding renters, so having enough money to keep making payments in this situation will make you a more qualified borrower.

Buy in Cash

If you have the capital to do so, you should seriously consider buying the property “all cash.” If you don’t need to take out a loan to buy your investment property, you won’t have to pay interest, points or any other related charges. This can make your investment substantially more profitable. Better yet, making a purchase in cash can make you a very attractive buyer. In some cases, cash buyers can negotiate significant discounts on properties that the owner is eager to sell.

Investing in real estate isn’t going to make you rich overnight. Over the long term, however, real estate investment is a great way to build your wealth and develop passive income. For more information on investment properties, and how to save for a down payment, click here

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