If you get swept up in the excitement of a beautiful property and the numbers don’t align, the investment will likely fall flat. That’s because real estate is a math game where your patience and planning are tested. Notably, many investors don’t put enough thought into residential investment financing, even though how you pay for a property is just as important (if not more) than the property itself. 

To stay in this for the long haul, you must stop thinking like a homebuyer and start thinking like a strategist. Your residential investment financing must be calculated, and you must not ignore the fine print while closing a deal. If you’re unsure how to make this new investment smarter, we hear you. Keep reading for some battle-tested financing tips that every serious investor needs to keep in their back pocket.

Prioritize the Debt-Service Coverage Ratio 

Relying on your current income to get real estate loans can be a losing battle. Most banks look at your salary to decide if you can afford a mortgage, which means that once you own a couple of houses, they’ll tell you that you’re tapped out. 

So when the goal is to scale your real estate portfolio, use DSCR loans, which focus on the property’s income. DSCR (Debt-Service Coverage Ratio) is a formula that proves a property earns more in rent than it costs to own. If you go down this route, the lender only cares if the house can pay for itself instead of digging through your tax returns. 

For example, if you find a great rental that brings in $2,500 a month and the mortgage is $1,800, the property’s profitability will qualify you for the loan. The lender will see that the house can make enough to cover its bills, so they don’t need to worry about your salary. 

Try House Hacking 

A popular strategy to build your property portfolio is house hacking. It simply means that you buy a small multi-family property (like a duplex or a fourplex), live in one of the units, and rent out the others. 

The difference here is in the financing because normally, if you buy a rental property as an investor, banks demand a 20% to 25% down payment. But if you promise to live in one of the units, you qualify for government-backed loans for regular homebuyers. 

Let’s suppose you buy a $600,000 fourplex. In this case, a regular investor would need $150,000 to close the deal, but as a house hacker using an FHA (Federal Housing Administration) loan, you’ll give a much lower down payment. 

Then, by the time you move in and rent out the other units, their rent could cover your entire mortgage payment. You can essentially live for free while your tenants pay off your building if you follow this route. 

Use Interest-Only Payments for More Monthly Cash

If you’re new to residential investment financing, your goal is mostly to have enough cash on hand to handle expenses or jump on the next big deal. That’s where interest-only payments can help. Instead of a mortgage where you pay back a piece of the house and interest, some lenders let you pay only the interest for the first 5 to 10 years. 

You benefit from the monthly cash flow that you get in such a deal because you aren’t forced to pay down the principal (the actual balance of the loan) right away. 

Eventually, your monthly bill is much lower. For example, on a $400,000 loan, a standard payment might be $2,400. But with an interest-only option, that could drop to $1,800, and the extra $600 will stay in your pocket. 

Take Bridge Loans to Close Deals Fast 

When you find a good property deal, you usually have days to manage residential investment financing. Since bank loan approvals can feel slow at such points, you get bridge loans and get the speed of a cash offer. 

These are short-term loans that get you through the purchase and repair phase. And since they are asset-based, lenders care more about the property’s value than your income. But you should only go for a bridge loan for residential financing to grab a property at a discount and refinance it into a long-term mortgage. 

You use the lender’s speed to win a good deal and to turn that fixer-upper into a stabilized asset without tying up your cash.

Turn Dead Equity Into Cash

If you have owned a property for some time, it might be worth much more now than when you bought it. That extra value is called dead equity because it’s just sitting there doing nothing. 

Notably, a HELOC (Home Equity Line of Credit) lets you tap into that cash and use it for your next investment without having to sell the property. A HELOC works like a credit card backed by your house, and it’s a revolving line of credit. You don’t pay any interest until you spend the money, which is smarter than a cash-out refinance. 

Summing Up 

When you think your money matters through, your new investment is more likely to be a success as there are no bottlenecks. If you want to make your property investments safe and stable, explore the extensive solutions at ROK Financial and plan thoroughly. We make sure you don’t lack anything at the financing front! 

FAQs

1. What happens to my bridge loan if I can’t refinance it in time?

You might have to pay expensive extension fees to the lender to get more time. And if you still can’t pay it back, the lender could take the property. 

2. If I house hack with an FHA loan, how long do I have to live there?

Usually, you’re required to live there for at least one year, after which you are free to move out and rent your unit to a tenant.

3. Is a HELOC risky if the housing market drops?

Yes, it’s risky. If your home value drops, the bank can freeze your line of credit, which means you can’t withdraw any more money.