If you love the idea of being a landlord, and don’t mind being on duty around the clock, buying an investment property may be the wealth-building option for you.
Property values have enjoyed a steady increase over the decades. That’s why real estate has earned its reputation as a sound investment that builds wealth and credit.
Most people, however, don’t have the quantity of cash on hand to purchase a house or apartment building outright. Still, if becoming a landlord means taking out a 30-year mortgage, the monthly payments from the tenants should be enough to service the loan and build equity for you, while leaving some cash flow so you can maintain the property.
If buying investment property sounds like a step you’d like to take, here are some credit considerations every investor needs to know.
1. Be mindful of the inquiry stage
Once you decide to purchase an investment property, it’s important to do everything you can to make sure your credit score stays as high as possible until the loan is approved and signed. Your goal is to land the best possible interest rate, because even half a percentage point can add tens of thousands of dollars of total interest payments to a 30-year loan (and affect your wealth-building abilities).
During this time, things like continuing to make on-time payments on your existing loans can be helpful in maintaining your credit score. However, sometimes people unintentionally lower their credit score when they’re actually trying to be fiscally responsible. For example, when shopping around for the best mortgage rate, keep in mind that multiple inquiries can have a negative effect on your credit score, especially if you don't have a long credit history. Fortunately, many credit bureaus recognize that you may be comparison shopping, so make sure you do this within a defined time frame of 30-45 days.
2. Keep credit utilization low
When maintaining a property, having access to credit can be helpful because it lets you make repairs and keep things in good living condition for your tenants. One thing that can affect your credit score is the amount of credit you’re using.
Unfortunately, keeping a higher balance could result in a lower credit score. As a rule, keep your credit utilization at 30 percent or less. For example, if your credit card has a $5,000 limit, the balance should not get any higher than $1,500. Throughout the billing cycle, keep an eye on the balance, and pay it down when you can.
3. Keep a cushion of cash
It happens. You get that call about a water leak, and before you know it, you’re spending your Saturday evening pricing plumbers, searching for one whose overtime rate is only in the range of mildly outrageous.
Being a property manager means expecting the unexpected, and one of the best ways to be ready is to have enough cash at the ready to take care of these problems. Build an emergency fund in your savings account, and keep your credit paid down so you always have that cushion to fall back on during any crisis.
4. Beware of low and no-interest financing deals
When it’s time to replace the oven range or a refrigerator, one of those “no payments, no interest for 18 months” deals can seem like a lifesaver. It sounds like a great deal, but these alluring promises are designed to play a psychological trick on you. Because you don’t have to pay yet, it doesn’t really feel like spending money when you’re making the purchase.
However, once the interest-free promotional period is up, a double-digit interest rate often kicks in. If you don’t have the cash to pay off the balance or make payments, you could end up with penalties that can affect your credit score. Before you sign on, always read the fine print.
Before you invest, do your research on credit scores and know your pros and cons. More than 8.5 billion credit scores compiled by VantageScore Solutions were obtained and used in the U.S. between June 2016 and July 2017. Whatever your stage in life, the market offers many options for those who wish to build their wealth through investing in real estate.