Your palms are clammy. You look again at your watch. Finally, the lender sets down your paperwork on his desk. His face tells you nothing. He says you can expect their answer in three months and then walks you to the door. This is how to secure investment property financing, right?
It doesn’t need to be. Securing a loan for an investment property can be about much more than a bank’s number-crunching. It can be a rewarding process. It can be a human conversation. And it can move you forward.
It’s all about preparation and finding the right lender. As a bank that makes relationships its first priority, Flagship offers clients helpful, friendly conversations with lenders who are on their side.
Financing your investment properties can be about finding solutions.
You can help make securing investment property financing a smooth, useful, and successful process through careful preparation in these three ways:
- Prepare an investment strategy.
- Prepare your financial information.
- Prepare for a conversation.
Prepare an investment strategy
Investing in real estate involves some major strategic decisions. Your strategy, of course, can develop over time as you gain experience, but you need to start somewhere. When you meet with your lender, you’ll bring them a project overview that summarizes the property you want to buy and your plans for it.
Give careful thought, then, to these strategic questions before you meet with your bank. That way, you can make the most of your conversation with your lender and give yourself the best chance of securing the right loan.
What kind of real estate do you plan to invest in?
Often, new investors plan to purchase 1-4 family residential properties, but there are many property options to consider:
- Multifamily: a building designed for five or more different families in separate units
- Agricultural: land you lease to farmers
- Retail: a building whose space you rent to one or more stores
- Office: a building you rent to one or more businesses for administrative work or professional services
- Industrial: a building, usually a warehouse, you rent to a company for the production or storage of goods
- Development: land on which you intend to construct residential or commercial buildings for sale
If you plan to invest in residential real estate, you’ll need to consider other questions like these:
- “Should I invest in urban, suburban, or small town real estate?”
- “Do I want my target market to be college students, growing families, single professionals, or another demographic?”
- “How close should the property be to where I live?”
Since you’ll be responsible for maintenance of the property, think through these questions as well:
- “What maintenance and upkeep tasks can I do myself, and what will I need to hire someone to do?”
- “How much to do I need to budget for both predictable and unpredictable expenses?”
To answer these and other important questions, you’ll need to consider your knowledge and experience with real estate, your current finances, the time you’re able to invest, and what kind of help you’ll need to succeed.
What are your financial goals?
Your investment strategy also requires clarity about your financial objectives.
Do you want the property’s monthly rental payments to supplement your current income?
Do you want to sell the property for a profit in the near future?
Do you want to deduct your rental expenses from your taxes?
These and other financial goals can often be complementary. It’s vital, though, to be clear about what you’re aiming at.
Investing in real estate can offer major financial rewards, but it can often take time before it pays off. Of course, investing in property also involves risks. Carefully define your goals, so you can set realistic expectations and position yourself well for success.
Prepare your financial information
Typically, the financial requirements for an investment property are more stringent than for a home you’ll live in. A smooth loan approval process relies on thorough, up-to-date financial documents.
Here are a couple important points to keep in mind as you prepare your finances:
- Check your current cash situation. You’ll likely need to be able to make a down payment of at least 20%.
Check rental rates for similar properties and estimate your monthly cash flow. You’ll need to show you can cover your monthly loan payments.
Your lender checks this by calculating your NOI (net operating income). Then, he or she calculates your capacity to repay the loan. This is the debt service coverage ratio (DSCR). It’s equal to your NOI divided by your monthly mortgage payments. Banks usually look for a DSCR of 1.20X or greater.
- Check your credit. Your rating will affect the options available to you.
Prepare for a conversation
Planning your investment strategy and, especially, your financial information is vital to securing investment property financing, but this doesn’t mean you need to have everything figured out. Some banks specialize in investment property financing and have expertise in the real estate market. They can work with you to refine your investment strategy and even suggest possible approaches you hadn’t considered.
So, when you meet with your lender, prepare for a conversation. Choose a lender with these three characteristics:
- Focused on building relationships
- Knowledgeable about the local real estate market
- Creative and able to customize your financing
Lenders focused on you and your success will do much more than crunch your numbers. Certainly, they’ll need an accurate understanding of your financial situation, but that’s just one part of the relationship.
Relationship banking means getting to you know, your goals, and all that you bring to the table. Relationship banking means putting knowledge of the individual customer together with knowledge of the market in order to find solutions. Relationship banking also means a desire to get creative, to come up with customized loans to meet your individual needs.
So don’t approach your lender as a judge who’ll deliver a verdict. Look for a lender who’ll be a partner, eager to work with you to find solutions.
Start the Conversation
If you’re ready to start a conversation, give Flagship Bank a call. We specialize in service to real estate investors. Even if you’re just starting, we’d love to talk with you. Since we know the Minnesota real estate market, we can ask questions and offer advice that will help you prepare well.
Usually, loan approval takes three to six weeks, but it’s a dynamic process. You won’t just be waiting to hear our answer. We’ve built our whole lending process on communication and transparency. We’ll be in touch, working creatively with you to find the solution you need.
That’s because we’re a relationship bank. Serving you is the goal of everything we do.At Flagship, you can always expect a familiar face and a helpful conversation that moves you forward. Call us today. We’re here to invest in you.