There’s a laundry list of decisions to make prior to closing on your first investment. For instance, you’ll have to decide where you want to invest, which type of property you want to acquire, whether you want to operate the property as a rental or flip it, and more. Few decisions are quite as consequential, however, as which type of institution you’ll use to finance your real estate acquisition.
Generally speaking, when buying real estate, investors have two options. Either pay for the acquisition outright, in cash, or finance their purchase of the property. When deciding to finance the acquisition, investors are faced with even more consequential choices to make.
There are several different types of lending products and mortgages available to real estate investors. Determining the right lending product, however, is only half the battle. Once you’ve found the lending product in-line with your investment objectives, you’ll have to then decide which type of financial institution is most closely aligned with your values and goals.
Many people may go straight to the nearest large bank. Often, the international and national corporate bank chains offer a diverse array of well-advertised lending products. But savvy investors know the benefits of shopping around for a mortgage. They’re likely to visit local banking institutions and credit unions before agreeing to borrow money from a bank.
Let’s look at the case for both big banks and smaller lenders.
Benefits of borrowing from a corporate bank
While corporate banking institutions may not offer the most desirable rates, there are benefits associated with borrowing from a large national or even international institution, including:
· More branches/nationwide reach: One of the primary benefits associated with borrowing from a corporate bank is their nationwide reach. You can visit a branch virtually anywhere in the country and discuss your mortgage. This is particularly helpful if you have investments in multiple cities or provinces, or if your primary investment is in a different city than the one you live in.
· Wider range of products: Bigger banks often have a much wider range of products for borrowers to choose from. This means you don’t necessarily have to go with a traditional fixed-rate 30-year mortgage. You can confidently select the best mortgage product for your needs, based on what the lender offers.
· Improved technology and easier payment options: Big banks have a lot of resources on-hand, which means they’re able to roll out significant technological advances much more rapidly than their smaller competitors. This can make it easier to pay your mortgage down, connect with a support representative and perform other administrative tasks.
· Better for bigger investors: If you’re growing a large real estate portfolio, bigger banks can often offer you more flexibility. They’ll see your status as a real estate investor and accommodate you in ways a smaller branch or institution simply can’t. This might include bigger lines of credit, waived account fees or consolidated account structures.
Benefits of borrowing from a credit union
Considering working with a local bank or credit union? Not only can you find a lender offering better rates to you as a real estate investor, you can also feel good about keeping your transaction in the community and supporting a local business. Visit a credit union and consult with them about obtaining a loan for your next real estate transaction. Here’s why:
· Supporting local business: When you work with a credit union or local bank, you’re keeping your capital in the community. This is more valuable than you might think! Not only are you supporting other business owners in your area, but you’re also investing in a network of area professionals. Investing in a credit union can help you build up goodwill and connections.
· Lower rates: Many credit unions offer lower rates and fees compared with big national bank chains. This means your operational costs are lower, and you’ll ultimately be able to extract more income out of your investment.
· Less likely to sell your loan: It’s fairly common for big, institutional lenders to sell off debt. While in the vast majority of cases, it doesn’t directly impact you when a bank sells your mortgage, it can make the process of closing out your loan significantly more complicated. Your debt is less likely to be sold while working with a local credit union.
· Leverage:If your portfolio becomes sizeable, you may become a large customer for your credit union or local bank. This means commanding a better relationship and getting preferential rates on certain products. Your cumulative holdings with that institution are a form of leverage.
Shopping for a mortgage
Regardless of whether you plan to work with a corporate bank or a credit union, it’s exceptionally important to know how to shop around for your mortgage. If you don’t look around at products offered by a wide range of lenders, there’s a strong chance you’ll miss out on an opportunity to secure a lending product that meets your needs and is in-line with your investment objectives. Here are a few tips to keep in mind while shopping for a mortgage:
· Pay attention to fees, as well as interest: When examining mortgage products, chances are your eyes are drawn directly to the interest rate. While this is undoubtedly the most important factor in your mortgage, it’s important to also pay attention to the fees associated with the loan. Some mortgages with low interest rates charge excessively high fees.
· Compare the same product types: When shopping around for a mortgage, it’s important you’re comparing the same type of loan from institution to institution. If you’re comparing different types of lending products, you won’t have a clear idea of what one lender offers over another.
· Work with a broker: Shopping around for a mortgage can be overwhelming. There are countless financial institutions offering a wide range of lending products at a variety of price-points. Working with a broker is a great way to ensure you’re getting the best possible loan from a sea of options.
Shopping for and identifying the mortgage that’s right for you takes considerable time and effort. Carefully selecting a financial institution ultimately ensures you have the tools necessary to reap a profit from your property. It can be a tiresome process, but once you put in the work, you’ll be rewarded in the return on investment you ultimately recoup.