Investing in real estate should not require you to spend a big fortune to start. And smart investors have mastered the game where they identify properties, use the money not directly coming from their pockets, finance the acquisition and turn the project into a huge profit. Some will tell you the more you borrow, the higher the returns you get on equity and creating no-to-low money down a good approach for wise buyers.
If you are building and then selling the properties, get a good team of property developers to make your work easier. But you will find many first-timers joining the real estate industry find it a tricky venture. The process is overwhelming, but navigating the ins and outs can be an uphill task to secure traditional financing. And the struggle comes where banks require around 20 per cent or a higher amount of down payment in your investment. If that sounds like you, here are ways to finance your first real estate investment the easy way.
Make a substantial down payment
If your focus is to get a conventional loan, make sure you have enough amount for a down payment because it will help you secure the best interest rates. For starters, banks will ask you for 20 percent of your property value. But if you find it hard to raise the amount, there’s another option you can use, including purchasing as an owner-occupant, and that can help you easily secure a favorable loan.
Clear any debt
The second step you need to do is to check your debt-to-income ratio (DTI). This will allow banks to evaluate your ability to handle monthly payments. You calculate your DTI by dividing monthly recurring debt by your gross monthly earnings. After dividing, you will see your percentage and the bank of your current DTI.
If your DTI is high, that means your debt exceeds your income level and may impact negatively your ability to acquire encouraging interest rates from the bank. It is even harder for you to secure any funding from other alternative lenders. Most of the time, you will find that lenders put 43 percent as the highest level of DTI that should guarantee you a mortgage loan, but hitting 36 percent and below is what they prefer the most.
Maintain good credit
Before you start your real estate venture, ensure your credit rating is good. If you plan to use a bank, your credit rating will determine the loan’s terms, and if yours is high, that will earn you low-interest rates. If your score is less than 740, that will attract a higher interest loan or compel you to pay a fee to lower the interest rate.
If you plan to visit lenders at any given time, make sure you are diligent enough with your credit ratings or score. You can maintain good credit by monitoring your credit rating, attending to errors or discrepancies immediately, and making payments on time. You can check your free credit report from available online tools such as Experian, TransUnion, Equifax or myBankrate.
Go for a fixed-rate mortgage
If you choose to go through the bank, you will have the ability to select between an adjustable-rate mortgage and a fixed one. A fixed-rate mortgage allows you to lock into an interest rate for the period of your loan. If you choose an adjustable-rate mortgage, there will be changes in the interest rate.
Adjustable-rate mortgages provide lower introductory rates, and the reason many homebuyers are attracted to them. But you should be careful because, along the way, the rates may rise at some point. Choosing to lock into lower interest rates will protect you from the increase of monthly mortgage payment if the rates shoot up. Therefore, don’t just go for an adjustable mortgage rate, but try to understand how it works and its changes to your monthly payments.
Funding from family and friends
Not many consider seeking financial funding from family and friends. But you can learn from World Trade Center developer Larry Silverstein and Warren Buffett, who financed their first deals through family and friends. And the good thing with this approach is you only need to sell them your idea and the reason they should get involved.
It is the simplest financing model because it requires no startup capital. Choosing to go the FHA route, you may find a family of 10 people bring not less than $1000 and pick up a multifamily property.Together with his Dad,Silverstein made their first acquisition after pooling money from 20 family and friends. They realized the only way to overcome financial hurdles is to become owners because they make money continuously. After his successful first project, he was able to pay back the investors with profits, and that foundation is to date one of the biggest real estate fortunes until today.
You can see that you don’t need to start a real estate investment by purchasing cash-in-hand only. And also, a bank loan is not the only way you can secure money to start your real estate dream. Therefore, utilize the tips shared above and make your real estate dream come true.