Guide to Reducing Financing Costs for Investing in Residential Real Estate
Posted on: 25 July 2016
Investing in real estate is seldom a bad idea, since the price of real estate more often appreciates than it depreciates. However, real estate requires the investment of huge sums of money which some potential buyers cannot raise on their own. Fortunately there are a number of financing options you can make use of to raise the deficit and get that property you're eyeing. Read on to learn more.
1. Save for a huge down-payment
Depending on your bank/lender, you will usually have to place a 10-20 percent deposit for the property that you want, so that the mortgage covers the remaining amount. One secret to reducing your interest rates is to put up as high a deposit as you can – even higher than the required amount. Going higher will allow you to borrow less and can help you to get a better interest rate than you would sticking to the required deposit.
2. Have good credit
Nowhere is your credit history more important than when you're looking to get a mortgage: you're required to pay a significantly large amount of money for a very long time, so your lender will be very interested in how you've been repaying other debts in the past.
Before you begin searching for your property, get your credit report and look at your credit score. A better credit score will give you better borrowing rates and terms. Some lenders may charge you an additional fee to give you similar terms as those with a higher credit score, or else your interest rate will be higher.
If you're buying residential property for rental purposes, some lenders will require you to have reserves in your bank account to cover your personal and rental property-related expenses for several months. The idea is to ensure that you can still meet your obligations even if some of your units are vacant.
3. Shop around smaller banks
If you can't afford to raise a huge deposit as suggested above or you have other special circumstances, steer clear of the financial big-names like national and international banks. Smaller banks are more flexible and may be better acquainted with your local markets. Research widely; you can use the input of mortgage brokers who have access to lots of loan products. Due diligence is most important – look at reviews, qualifications, certification and history among others.
4. Try other finance lines
If you're certain about the value of a certain property and need some extra money for renovations or a down-payment, consider other sources of money such as your life insurance policy, peer-to-peer lenders or home equity lenders. These sources of cash are riskier, so you want to research adequately to ensure that you can service the loan and have a fall-back plan in case your main income streams fail. Of course, your investment history should speak for you; individuals are generally more conservative lenders than entities because of the increased risk.
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