Real Estate Investing is a profitable endeavor that is becoming increasingly popular, especially with reality television showcasing the process from start to finish — including potential revenues that are enticing. With the Arizona housing market booming, now is the time to consider purchasing Arizona investment properties. Although many people assume that you have to have a cash to buy investment properties, there are many options for financing your investment. Our team at On Q Property Management, the Phoenix property management experts, have compiled a list of tips for financing Arizona investment properties.
Have a Sizable Downpayment
Although it’s preferable to buy investment properties with cash, it’s not uncommon for investors to start investing with borrowed money. If you’re just starting out in the investment world, you will likely need at least a 20% downpayment. So, if your investment property is %100,000, you’ll need a $20,000 downpayment. This is typically the best case scenario — the more you put down, the more likely you are to obtain a loan, and you’ll reduce the amount of debt you acquire by placing a larger downpayment. Keep in mind that you’ll want to have extra funds for repairs and other costs associated with investment properties, so don’t plan on using all of your funds just for downpayment purposes. If money is tight, some options for covering your downpayment include tapping into savings accounts, retirement funds, 401K, IRA draws, and picking up weekend jobs or freelance work to save cash.
Have Good or Excellent Credit
One of the first criteria that banks and mortgage lenders look at when determining loan eligibility is credit score. Most banks require an absolute minimum of 620, although credit scores in the mid-700’s-800’s are preferable. The higher your credit score, the more likely your bank or lender will grant a loan to you for investment purposes. In addition to the score, your lender will also look at your credit history, including debt and payment history. If there is anything negative on your credit report, such as a foreclosure, late payments, or unpaid child support, your lender may advise credit repair or credit work. Please note that it’s best to let your lender pull your credit before trying to repair anything on your own. Most lenders will run your credit through a simulation program that can tell you exactly what you need to do to repair your credit in order to qualify for an investment loan. Because credit is so complex, you may want to leave this part up to the professionals who can guide you through making credit repairs or doing credit work, if necessary. The last thing you want to do is to try to repair your credit blindly, without direction.
Have a Good Record of Work History or Tax Returns
Even if you have a great down payment and great credit, your lender will want to see proof of steady work history. Most lenders want to see at least 2 years of steady income by checking pay stubs, employment verification, and tax returns. Many people are self-employed, and while it’s harder to qualify for an investment loan as a self-employed (or 1099) individual, don’t fret, because it’s not impossible. You’ll want to show at least 2 years of steady, profitable income via tax returns. Each year should show an increase in earnings, or at least show a steady stream of income without a decrease in earnings. If you don’t have at least two years of tax returns or profitable income as a self-employed individual, you may need to find alternative lending situations, such as private financing, seller financing.
Maintain an Acceptable Debt to Income Ratio
The term “Debt to Income Ratio” has to do with the amount of income that you have available to you versus the amount of recurring and revolving debt that you owe. Debts can include things such as student loans, current mortgages, recurring bills, credit card debt, auto loans and more. Maintaining an acceptable debt to income ratio is crucial if you decide to seek out a loan for your real estate investment. Even if you only require a small loan to acquire or repair your real estate investment, a mortgage lender will have several questions in regard to your loan request and may scrutinize any outstanding debts that may impact your debt to income ratio. As a rule of thumb, many lenders prefer that your total mortgage investment take up no more than 28-36% of your total net income.
Have Your Documents Ready
The real estate market can move quickly, so it is essential that you have all of your ducks in a row before moving forward with making an offer. You’ll want to get approved with a lender before you start your investment home search because in some markets, Arizona included, a property may only be listed for a few hours before having an offer on the table, so you don’t want to be left behind while trying to scramble to get a loan approval. Most sellers won’t consider an offer without a pre-approval from a lender, or without proof of funds from a bank. Documents that you may be asked to provide to your lender may include, but is not limited to: 6 months of recent pay stubs, 2 years of tax returns, 2 months or more of bank statements for all accounts in your name, marriage certificates, divorce decrees, human resources contact information at your place of employment for income verification purposes, and child support agreements.
Speak with Your Lender about Your Loan Options
The type of funding source that you choose can dictate what options you have in regard to a real estate investment. While you may have utilized a residential loan for your own home, such as a Federal Housing Administration (FHA) or Rural Development (RD) loan, these loans often come with stipulations that these homes must be your primary residence and may not be used as a rental property, or must be resided in for a minimum amount of time before you can rent the property out. Two popular loan options for real estate investors are conventional and fix and flip loans. Conventional loans are a great loan choice for rental investment properties, especially if you are new to the investment world. They’re standard loans that require a 20% or more down payment for investment properties. In some cases, the lender will even count the potential rental income as qualifying income, so your loan amount may be more than expected with that added income. On the other hand, fix-and-flip loans are an option for investors who want to “flip” their investment property (repair and sell for profit). These loans are short-term loans that give you a certain amount of time to fix the property and sell it, typically one year or less. Other options for financing include private financing and seller financing, which are less common scenarios but can be beneficial for investors who have less traditional careers or have lower credit scores. You’ll want to do your research to find the best loan for your unique situation.
Understand the laws and speak with your CPA
Please note that before moving forward, you’ll want to speak with your Certified Personal Accountant regarding tax laws for investment properties. A CPA is the only person who can legally advise you on tax laws. Do know that moving forward, you may be required to obtain a transaction privilege tax (TPT) license by the state of Arizona if you receive any type of rental income — even if you employ a property management company to work on your behalf. Rental income includes, but is not limited to, rent, late payments, pet deposits, and federal rent subsidies provided by the government (HUD). A great source for information regarding the Residential Rental Licensing Requirements and processes can be found here. However, before jumping in, it’s best to speak with your CPA regarding tax laws for rental properties prior to purchasing so that you know what to expect, and your information comes straight from a professional who understands local tax law.
Partner with an Investment Professional
It is essential to partner with an investment professional right away so that you have guidance through every step, from beginning your investment journey to renting your property out for revenue and beyond. On Q Property Management is not only a premier Phoenix property management group, professionals that specialize in Arizona Rental Investments. We specialize in advising clients from start to finish in investment in properties in the Arizona housing market. We provide experienced Real Estate agents to our clients, provide free ROI (return on investment) analysis to determine if your investment will be profitable, advise on auction bidding, provide access to contractors, and so much more. Our streamlined services are crucial to your success as an investor — the organization, guidance, and professionals provided will be an asset to your investment journey. To get in touch with our professionals, please visit our property investment page or contact us at 480-470-3906.