What Do Banks Look for In a Rental Property Investor?
Enrique Jevons • Aug 04, 2020
By Enrique Jevons
How can I borrow money to buy a rental property? I am not a lender, but I have purchased a lot of rental properties over the years and currently, and I currently have over 100 in Washington State. So, here are my thoughts:
Many people over the last two years have invested in rental properties for the first time.
Some investors have tapped into the equity in their primary homes, 401K, retirement income, or other sources of funds like an HELOC to get started while many others have had to go to the bank for financing.
If you’re just getting started with investing in rental properties and will have to go to the bank for financing, this article will provide you with insight into what the banks look for in a rental property investor.
Down Payment
During the process of buying a primary residence, you may have received the advice from a lender or mortgage broker to put down at least 20%.
The same is true when buying a rental property, down payment does matter, but it’s even more important and most lenders we'll expect you to put down a down payment as high as 25%.
Paperwork
When buying a rental property, you should also make sure that your financial paperwork is ready to show a lender. This should include at least two months-worth of statements from your bank, investment accounts, retirement accounts, and pay stubs.
Besides your regular financial paperwork, you should also come prepared with your social security card, driver’s license, and if you recently declared bankruptcy or you got divorced you should also have your bankruptcy discharge form and or separation papers.
Write Everything Down
Are you anticipating getting a gift from a family member or friend? If so, be prepared to document this gift because you don’t want the lender to regard the gift as a debt.
Credit Score
Your credit score when buying your first rental property is also important, most lenders will expect you to have a credit score that's not lower than 740 because any credit score that’s lower than 740 means that you most likely will have to pay higher interest rate.
Don’t Choose A BIG Bank
Although working with a big bank may be ideal for some investors, the reality is when you're getting started it's often times better to go to a smaller bank. Why? Smaller, neighborhood banks often have more flexibility than bigger Banks, they also are in many cases more knowledgeable about the local market and they will have a greater interest in investing money locally because they know that it will make a difference in the area.
Private Money
If by chance you've been turned down by a bank, you may want to consider a private money lender.
The private money lender is an individual or lending institution that will typically lend money for a higher interest rate.
Although this source of financing isn’t always ideal, if the property is a good investment, it may make sense to go with a private money lender especially if there's a good possibility of cash flow and appreciation over time.
Learn More
To learn more about what lenders will look for when you’re applying for a loan for your first rental property, or to speak with us about our property management services, call Jevons Property Management today (509) 895-7777 or connect with us online at www.jevonsproperties.com
