This year’s economic turmoil has transformed the contemporary financial climate. This is particularly true for real estate investors.
To combat rising inflation, the Federal Reserve has raised interest rates six times in 2022, as of this writing. The most recent hike, in November, put the federal funds rate at 3.75%-4%, up from around zero at the beginning of the year.
When the Federal Reserve raises interest rates, this increases the amount homeowners are required to pay toward their mortgages each month. These rate increases have most strongly affected people who were either in the process of purchasing their first property, those who already owned a house but were looking to refinance their existing mortgages and investors looking to purchase additional properties.
Financial institutions are also tightening their lending standards for real estate investors, making it more challenging for customers with low credit scores or high debt levels to secure financing. For example, a borrower’s credit score might be good enough to qualify for a loan, but if their debt-to-income ratio is too high, they may not get funding.
Additionally, some lenders are requesting bigger down payments from prospective real estate investors. They do this to ensure that the borrower has sufficient savings.
Professional real estate investors are also encountering difficulties securing funding for new projects such as buildings, infrastructure and land that will be developed into residential and commercial areas. Banks are hesitant to lend money because they are concerned about default rates as well as the possible loss in property value that could occur if the properties were not sold soon enough when construction finished. Because of this, investors will likely require a significantly larger amount of capital to support their projects than they did in the past.
If you’re planning to start investing in real estate or grow your property portfolio in the current environment, you need to make sure you have all of your documentation ready and in order before approaching a lender.
If you’re a professional investor looking to secure funding for a new project, this means you must demonstrate to lenders that you have a solid track record and have been successful in the past. Of course, words will not suffice. Make sure you have the following:
• A detailed business plan: This should show the history of your company, its current status and how you plan to grow it in the future. In addition, three-year financial predictions for income, expenses and cash flow should be included, as well as any pertinent financial statements and tax returns from prior years.
• A personal financial statement: Creditors may also consider your personal financial statement when determining your creditworthiness. This statement lists all of your assets and debts so that creditors can decide how much of a risk they are willing to take on. This will bolster your credibility and make them trust you more. You also need to show proof that you can afford the loan payments on time every month, including documentation that proves your ability to repay any existing debts.
You need to have a detailed breakdown of how much money you will have for the projects and why it’s needed. This information should include an overview of your current assets and liabilities as well as a forecast of what you expect your income and expenses to be in the coming months and years.
• Income tax returns: You need to have information about income from work and other sources, such as investments or rental properties.
Successful real estate investing is not just about securing funding, though. Equally important are the people around you. Professional investors should be particular about who they are working with. You need to ensure you have a competent team, including legal counsel, and are aware of all the risks of investing in real estate—particularly in the current environment.