Insiders Secrets for Buying an Investment Property Series
Here we’ll be talking about several strategies for financing your rental properties, if you’d like a bit more information, I HIGHLY suggest you check out our guide 6 Clever Buy and Hold Loan Ideas HERE.
And yes, even with the current high interest rates, the record high rental rates and high rental demand of our growing state allow these strategies to work.
Many investors choose to pay in cash for an investment property, bringing a certified check or sending via wire transfer. This is the easiest form of financing, as there are typically no complications, but for most investors (and the vast majority of new investors), all cash is not an option.
Financing your investment property may produce significantly better returns than paying all cash. By using your cash only as a down payment and then financing the remainder, the tenants essentially pay off the property for you over time, making your cash-on-cash return much higher.
FHA loans are designed only for homeowners who are going to live in the property(not forever), so this option only works for duplexes, triplexes or fourplexes. You live in one unit and rent the others out. After the first year, the occupancy requirement ends and you can rent out the unit you were living in.
A subset of the FHA loan, a 203K loan allows a buyer to purchase a house that is in need of some rehab and build the cost of that into the loan itself. Like a standard FHA loan, a 203K loan still allows for a low down payment.
In some cases, the owner of the property you want to buy can actually fund the purchase. In this case, you make monthly payments to the seller rather than a bank. Typically, the only time a property owner will do this for you is if they own the home free and clear.
Hard money is financing that is obtained from a private business or individual. While terms and styles change, hard money is primarily based on the value of the property, has shorter term lengths, has higher than normal interest rates, does not require income verification or credit references, and can often fund in just days. It can be beneficial for short-term loans in certain situations, but use hard money with caution.
While similar to hard money, private money is distinguishable due to the relationship between the lender and the borrower. Typically, with private money, the lender will not be a professional lender. Often times, there is an established relationship with a private money lender (think family and friends), making the terms much more flexible.
Home Equity Loans and Lines of Credit
Many investors choose to tap into the equity in their primary home to help finance the purchase of their investment properties. Banks and other lending institutions have many different products, such as a home equity installment loan (HEIL) or a home equity line of credit (HELOC) that will allow you to tap into the equity you already have.
The world of commercial lending may also be a viable option for your investing. If you’re looking to buy a property other than a 1-4unit residential property, a commercial loan is probably exactly what you’ll be needing. They typically have slightly higher interest rates and fees, shorter terms, and different qualifying standards.
Never let a lack of cash stop you from achieving rental property success. It may take time, but there are plenty of ways to find investment property financing to launch or grow your buy and hold career!
Next up in our Insiders Secrets for Buying an Investment Property series is a must-read – Red Flags to Avoid when Buying an Investment Property. You might be surprised by what to look out for before you make an offer.
Parker Properties, Inc.
With a background in property management, I know which homes make the best investments and excel at managing those properties for you after we close. My meticulous eye and high standards are applied to every aspect of caring for your home & your investment.
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PO Box 1273
Kamas, Utah 84036