Beginner investors often find it difficult to finance their first property. First-timers don’t have cash flow coming in from other investments yet, and they might not fully understand the process of financing a property. If you’re trying to figure out how to finance your first investment property, here are some quick tips for getting started.
1. Know Your Credit Information
Before you can proceed, you’ll need to make sure your credit is in good standing. Get a free credit report to find out if there’s anything you need to address. This information can also give you a good idea of what you’ll need to qualify for on a loan. In this stage, it’s also good to consult with an expert to help you raise your credit score before you apply for a loan.
2. Figure Out What Type of Investment You Want to Make
If you’re buying a vacation home, it will be a different financial process than buying a flip property. For this reason, you’ll need to research and figure out what type of investment you want to make before you can apply for a loan.
3. Get Your Paperwork Together
To apply for any loan, you will need to have copies of your recent bank statements, your retirement account statements, your investment account statements, recent pay stubs, your ID and social security, and potentially other documents as well. If you gather these documents ahead of time, you’ll be ready to act fast when you find a property you want to invest in.
4. Get Others on Board
Whether you’re a first-time investor or a seasoned investor—but especially if you’re a first timer—you shouldn’t try to do this alone. Financing an investment property takes a lot of work and expertise. You’ll likely want to hire the following types of professionals:
- Credit consultant (to help you repair or improve your credit score)
- Accountant who deals with investors frequently
- Real estate attorney (to help you with your contract)
- Mortgage professional
- Investment property advisor or experienced mentor
- Attorney to help with asset protection
5. Get Pre-Approved for a Loan
Before you start shopping for a property in earnest, you should get pre-approved for a loan. A pre-approval is invaluable when you’re trying to negotiate the purchase of the property. It offers assurance to the seller that you will qualify and complete the sale rather than wasting their time.
6. Make Sure You Have Money for a Down Payment
Saving up for a down payment on your first investment property is difficult because you probably aren’t selling another property to help pay for the new one. But no matter how good a loan you get, you’re still going to need money for a down payment. You will need at least 20% of the home value, as a rule of thumb. The more you can put down, the better.
7. Dive In!
Once you’ve completed all the above steps, you’re ready to dive into the world of real estate investing!