Rental Property Financing

Rental Property Financing

If you are looking for a specific type of funding such as rental property financing, then you may find this quite difficult to obtain compared to loans for a normal property purchase. When I say difficult to obtain, by this I mean that it may be hard to get a mortgage from a banking institution with decent terms and conditions. For instance, to acquire financing for a rental property you may be given by your bank higher rates, the processing fees may cost more, the conditions on the loans may be tighter and so on. This all eventually adds up to a difficult process compared to normal property buying.

On the other hand, this difficulty can be reduced by some degree and the chances of succeeding in obtaining finance on good terms can be achieved. This is possible by presenting a well-thought-out business plan to your potential lenders. To acquire financing for a rental property, a detailed and realistic business plan should increase your chances perhaps quite considerably in the eyes of a potential lender. Well, what does a good business plan need to have. First of all, you need to work out exactly how much you will need to borrow. This can easily be derived from how much the property will cost to buy, plus all the initial expenses involved in making the property fit for tenants to occupy (plus any other necessary expenditure such as an estate agent’s fees etc), and then minus the amount you are willing to put in from your own funds.

Obviously in order to borrow finance from a bank and to pay them back over time, you will be needing to make a profit from your rental property investment. Again, this is pretty much straightforward to work out and present in your business plan. Basically, you need to add all your projected monthly expenses – including the mortgage and interest payments – plus any maintenance, insurance and other costs, and then deduct this whole amount from the rental income you expect to get. These will all be estimates of course, so your research and judgement needs to be done carefully.

Not to mention, you may need to take into consideration other factors that may or may not influence future costs rising. This includes things like your interest payments, the value of your property may rise or fall over time (which is dependant on many factors) and so on. Therefore, extra care needs to be exercised when constructing a business plan for potential lenders. Every possible or realistic cost, expenditure, rental income increases or event needs to be detailed in your plan.

A good way in making sure that you do not miss anything obvious out, is to note everything initially on to a spreadsheet. This way, you could create columns for each type of expense. For example, a column for maintenance, and then list every possible type of expense that can occur that will require a maintenance cost.

If you are planning on investing in many types of properties, for example four or five apartments in one block, then compiling a business plan becomes somewhat more complex. More research may need to be done on various possibilities (forecasting of costs and income etc) occuring over the lifetime of the loan. This may involve a lot more time compiling so again extra care needs to be taken when estimating all the different types of costs and expenditure.