How to Finance a Rental Investment Property
Real estate, whether long-term or short-term, is a promising investment opportunity with lucrative profit margins. But a common factor that bars interested investors from dipping their toes in the pond is often related to capital. While buying a house is an expensive undertaking, you don’t have to dismiss the idea of investing in rental property because you’re low on funds.
This article provides a detailed run-through on financing a rental property. So if you’re thinking of adding real estate to your investment portfolio, stick around to find out which method is best for you.
The most obvious way of acquiring rental property is also the most traditional, paying cash upfront.
One of the most important reasons to consider paying cash upfront is being able to avoid interest payments. The longer your loan, the more you end up paying for the house as interest accumulates over time. Another advantage of paying cash upfront is that it guarantees 100% equity of the rental property, meaning any leftover money can go into one of the ways to increase the value of your property. Sellers are also more likely to take you seriously when you’re willing to pay at a moment’s notice. Without the delay of third-party lenders and the paperwork that comes with mortgages, sellers are often more willing to let you pay below the asking price.
However, there are downsides to coughing out so much cash at once, one of which is that it stalls your cash flow. If the property you invest in is substantial enough, it could prevent you from investing in other lucrative properties or making renovations on the one you recently acquired.
Opt for a Conventional Bank Loan
The first place people often think of when trying to get a loan is the bank, which is why it is a conventional method. Most people know you can get a home loan for a house you plan to take up residence. But you can also get one for a property you plan to put up for rent.
You’ll often have to provide up to 30% as a down payment for the loan, but after you can expect to make monthly payments for the duration of your loan.
The process often requires you to provide several documents, including your credit history, statement of employment, and declaration of assets and liabilities for screening purposes. Once you’re approved, you can proceed with your purchase.
Find a Private Lender
Sourcing a loan through a private lender is quite similar to getting one from a bank. Although their rates are often higher, two factors might influence an investor to opt for private funding.
The most common reason is time. Getting a loan through a private lender offers the advantage of speed, which could be critical in acquiring particular rental property. You might need fast-paced financing when you know there are other interested buyers or a time limit on the deal.
Another reason to consider private funding is if your credit score is not great. Banks receive several applications and are thorough about evaluating and granting loans to people with excellent creditworthiness. If you have some outstanding debts, another loan, or other blemishes on your credit report, it’ll be harder for you to get a loan. But private lenders are more willing to take on the risk of an investor with a less than pristine credit score.
Consider Seller Financing
Seller financing is similar to a conventional bank loan or private funding. But in this instance, the seller also acts as the lender.
While this method benefits speed and cutting out the bureaucracy and high interest rate of other lending sources, it requires a more strategic approach. The seller might be reluctant to allow you to purchase their property on credit, but with the right know-how and attractive conditions, they might be open to it.
Apply for a Home Equity Loan
Another way to secure financing for a rental property is through home equity loans. It is similar to a mortgage, where the investor uses a property they already own as collateral to acquire another one. It can be a great source of funding as investors can use up to 80 – 90% of the value of the first home. While this method essentially allows you to obtain one or more properties, you risk losing all of them, including the primary residence, should you default. Naturally, this downside makes many people apprehensive about this funding method, especially if you’re confident about the returns your new rental property will produce. But with proper long-term planning, you can make it work.
Alternatively, you can also go via the HELOC route. So rather than collecting the funding from your home equity as a lump sum, you can spread out the payments or access it on an as-needed basis. The split payments can let you plan the financing of your investment better. But HELOC often attaches variable interest rates which could exceed your expectations.
Apply for an Online Mortgage
If you’re looking to skip the hassle of filling tedious paperwork that comes with conventional bank loans, private funding, or seller financing, you could go online. You can access several mobile and web-based applications on your phone or laptop to get a loan. This method is by far one of the most convenient and faster methods to secure financing. You could create an account and get approval within days of applying.
On the downside, they usually have higher interest rates or hidden fees to compensate for the speed. People with low credit scores might also find it hard to get approval.
As long as people need homes, offices, or other indoor spaces, rental property will always make a promising investment. While capital is a common hindrance to investing in real estate, there are many ways interested investors can secure financing for rental property.
It’s your responsibility to carefully evaluate your options while considering your financial realities and long-term goals before reaching a decision. Once you’ve acquired a rental property with solid potential, managing it is essential to maximize your profit. That’s where finding the right property management company comes into the picture. Bay Property Management Group specializes in effectively managing residential and multi-family properties, so you don’t have to worry. We can help with all your rental property needs, including leasing out spaces in your newly acquired building, screening potential tenants, or hiring a manager to handle customer care.
This article has been published in accordance with Socialnomics’ disclosure policy.