When you invest in real estate, one of the largest expenses you’ll incur—aside from the price of the property itself—is the amount paid in fees and interest to the bank holding your mortgage.
As always, minimizing the amount of money you’re spending on owning and operating your investment is of the utmost importance. You need to find a way to achieve a positive cash flow balance. If you’re paying down a high debt balance with unfavourable interest rates, it’s going to be very difficult to turn a profit.
While it may be tempting to buy your property with cash or another type of lending product, traditional mortgages are advantageous for many reasons. Mortgages allow you to maintain liquidity directly after an acquisition, giving you the resources necessary to renovate, market or reposition your new asset. Unless you’re an experienced investor with a lot of liquid capital to spare, you’re probably going to want to stick with mortgage acquisitions for the time being.
But just because you receive a quote for a certain interest rate doesn’t mean that’s the rate you’re going to pay. You can work with your lender to secure a more favourable interest rate. While tact, knowledge and skill are necessary, it’s possible to negotiate much more favourable mortgage rates for your next acquisition.
Once you’ve found the perfect investment property, you’re ready to close the deal and close it fast. After all, you’ve probably spent months searching for the perfect place. The seller is also eager to get the property off of their hands and may be putting pressure on you to close the deal.
Before you sign up for the first mortgage you’re approved for, it’s worth taking the time to examine all available mortgage products. In many cases, this means accessing the mortgage best for you and your investment business.
After shopping around for the perfect property, it can be frustrating to spend a significant amount of time also shopping around for the perfect mortgage. Doing so will ultimately save you a significant amount of money. You’ll find better mortgage lenders and negotiate the lowest possible rate for your upcoming acquisition.
- Make sure you’re qualified: Mortgage rates are usually based on the amount of risk your lender expects to assume by loaning you money. If you’re not a highly qualified applicant, they’ll believe you represent a higher risk and charge you accordingly. One of the best ways to lower your mortgage rate is by improving your credit score and your credibility as an investor.
- Compare multiple lenders: Shop around for your mortgage. Thankfully, online tools make it easy to compare lending products offered by major financial institutions. Be sure to also check in with local banks and credit unions. They’re often able to provide much lower interest rates than their corporate competitors. Check non-traditional resources like online banks, as well.
- Use quotes to negotiate: If you find a rate you like but it’s from a financial institution you’d rather not do business with, try taking that quote to your bank of choice. You should use the existing quotes you’ve gathered as a negotiating tool, to show loan officers which types of perks other banks have offered you. It’s also a good way to demonstrate the interest rates you qualify for with other lenders.
- Pay points at closing: If you have the capital necessary, a great way to lower your mortgage interest rate is by paying points at closing. One point is equal to one percent of the amount being borrowed. If you buy a building for $300,000 and pay 20 percent down, your mortgage will be $240,000. When you pay one percent of that value, you’re essentially pre-paying the interest, reducing the amount you need to pay.
Get familiar with types of mortgages
While traditional, fixed-rate mortgages are usually the best option for new and even experienced investors, there are alternatives worth considering. Here are some of the most useful types of alternative mortgage you may want to consider using for your next acquisition:
- Interest-only mortgage: With an interest-only mortgage, you’ll only need to pay interest, not the principal, for the first several years of the loan’s life. While this slows down the repayment time, it provides you with more liquidity and flexibility to invest in the property as the situation changes. It may also be useful for flipping properties.
- Combo loans: To avoid paying for private mortgage insurance on acquisitions where less than 20 percent of the purchase price was paid down at closing, some buyers may opt for combo loans. These are two loans of any type used to close the transaction.
- Balloon mortgage: With a balloon mortgage, you only need to pay interest for a few years. The loan then ends after the agreed-upon period, and you need to pay down the outstanding balance. This can save you a significant amount of money in terms of interest and fees if you’re confident in your ability to pay down the balance at the end of the term.
- Adjustable-rate mortgage: While there are several types of adjustable-rate mortgages (ARMs), the most common is called the 5/1 loan. With this type of mortgage, the interest rate stays the same for the first five years. After the initial five-year period, the interest rate fluctuates depending on economic conditions.
As a real estate investor, your primary objective is to reduce your operating expenses to optimize your bottom line and turn a profit from investment properties. Learning how to identify and secure the best rate on your mortgage or other loan types will allow you to achieve profitability faster, and help you along your journey toward financial independence.
You may be eager to close on a deal and get the property you’ve been scoping out, but don’t hurry through the sale! Make sure you’re putting the same level of diligence into finding the right mortgage, lender and terms.