The truth is, financing your first investment property is not as complicated as it sounds, and definitely not as many inexperienced investors make it out to be. As a matter of fact, there are a number of ways in which first-time property investors can finance their projects – some of them are known, some are unknown to many people. You just need someone, perhaps a real estate agent, or a loan broker, to explain all the financing options that are available to you, helping you secure the best deal for your very first investment project. What’s more, in order to make this endeavor a success, there are some very helpful tips, which we will take a look at later on in the article. But first –
How can you finance your investment?
In Australia, besides the popular and traditional mortgage financing, there are several other methods to finance your next investment project, including:
SMSF property loans – this is a loan that’s used by an SMSF (Self-managed super fund) to buy an investment property. However, if you choose this method, know that the return on the investment – whether capital gains or rental income – will all be channeled back to the fund, boosting your retirement savings. With this loan, the loan-to-value rate, as well as the interest rate, varies significantly with lenders, which you will find around 70-80 percent. The rules surrounding these loans are super strict though and it’s only available to those with SMSFs.
Conventional financing – don’t let the name mislead you on the origin! These loans come from banks and other institutionalized lenders. The loans come with lower interest rates, however, applying for these loans can take a really long time, and the application process is a bit complex as well. It is required that for you to successfully apply for these loans, your credit score, as well as a down payment set by the lender, must be met.
Private money lenders – do you have anyone in your inner circle, maybe a friend or a family member, who has some extra cash that they are willing to invest? If so, then you don’t have anything to worry about. There you have some money for your investment. You will just need to enter into some sort of an agreement with the individual with regards to repaying the borrowed money.
Home equity loans – you can decide to borrow against your current home’s equity, which is also a smart way to finance your investment property. These loans come at considerably low interest rates and other adjoining fees. The loan could be in terms of a home equity line of credit, cash-out refinance, or home equity loans.
Hard money lenders – these are semi-institutional lenders who provide short-term loans to investors. Now, since they are short-term, they come at a high interest rate. If you are planning for a quick sale of the property or maybe pay back the amount before the entire term is over, then this will be a good option for you.
Financing tips for your investment property
Lower rates aren’t always the best – when looking for a way to finance your first investment property, you should keep in mind that lower interest rates don’t always mean better deals, as there are so many things you will have to consider to determine if that particular loan will work for you. There are some methods of financing, such as private funding and hard money lenders, which have higher interest rates, but when you look at other factors such as flexibility and speed of implementation, there are much better than the traditional methods. Your bank may take several weeks or even months, to process your loan, but private and hard money lenders will only take a few days. Also remember, given the competitiveness in today’s market, only those who act fast realize real success. The key takeaway here is that interest rates are not everything, and it’s better to pay a slightly high interest rate and have the money immediately rather than pay a low interest rate only to have to wait for the money for months.
Prepare the finances first before looking for a deal – as a first-time investor, it is very common to look for a good deal first, before you have even prepared the capital to purchase it. This is a bad idea for a number of reasons: for starters, how can you know which property is within your price range if you don’t have access to the money yet? You will end up wasting time on the property you can’t afford. On the other hand, with money, you will know the amount you are about to spend, and that means you will act a lot faster when you come across a property that you like and can afford. Remember the speed of implementation is invaluable to a property investor.
You must have an investment strategy – if you want your investment process to be a success, you need to have a clear investment strategy in place. You have to think about how you are going to meet your investment goals when coming up with a strategy considering all the financial limitations that might be there. Borrowing money without a clear plan equals total wastage. Based on your investment plan, you will be able to choose the right credit for your case and the amount you need.
For SMSFs, given all the restrictions, allowing you to buy only one single asset – if you are borrowing to buy land and the building, the law allows you to buy only one asset, meaning that you will have to come up with two contracts. Now, in this case, you will need to come up with a different strategy. One part contract loans come in handy perfectly. This is where your lender enters into the two-part contract for you, while you enter into a one-part contract with them. The lender basically acts as an intermediary, converting the land and house into a single asset to give you more flexibility with your choices for investment property.
Yes, financing your first investment property can be intimidating, but with proper planning, it shouldn’t be difficult. If anything, it should be exciting, and you should look forward to it. With proper guidance, you will sure find the best deal that suits your circumstance.