Five Tips for Financing Investment PropertyFebruary 3, 2020
Forget the naysayers; investing in real estate can be profitable. Say you put 20% down as down payment; you will receive rental income on 100% of the property allowing you to recoup your down payment and pay the remaining amount.
But here is the thing:
Though it is fun and profitable, financing is a pain. Most mortgages are for people looking to buy primary residences.
So, what options do you have?
Below are a few ways to finance your investment property.
1. Down Payments
If you can, we recommend making a sizeable down payment. Somewhere between 20% and 25%.
A substantial down payment gives you more skin in the game and could be the incentive that banks need to finance the remaining bit. Why? Well, should things go south, banks are cushioned as you will lose your stake before they lose any money. This increases their level of confidence in you.
Furthermore, it could help you secure loans at a lower interest rate.
Though mortgages are unavailable for investment properties, you still have a few options.
Home Equity Loans are always a good go to, as you can tap into 80% of your home’s value to purchase your investment property. Home equity loans have lower interest rates, often not exceeding 7.5%, and have a more extended repayment period of 20 to 30-years.
Though Rent to Own properties are few and far between, they save you the trouble of raising a down payment. As you rent, you can bolster your creditworthiness and save for a down payment as well.
You can also work with an Investment Partner. Though it means splitting the profits, it is recommended when you don’t have the required amount. By and large, an investment partner allows you to get your property sooner rather than later.
Finally, there is Transactional Funding. It is one of the least known forms of real estate funding, and it is best for people who plan to be in and out of deals quickly. However, it is limited to wholesale real estate with quick turnaround times.
3. Owner Financing
Owner financing is when a buyer directly finances the purchase through the seller instead of a bank loan.
The seller extends credit to the buyer to cover the purchase of the property, after which the buyer will make regular payments.
With owner financing, you get faster closing as you don’t have to wait for a loan officer or legal department, cheaper closing as there are no appraisal costs, and flexible payments.
However, it does have a few shortcomings. Interest rates are likely to be higher, and there are balloon payments that are due after five years.
4. Banking Options
If you are short on your down payment, you can go to a local bank for financing. Local banks are more flexible, they know the local market better, and they have more incentive to invest locally unlike the big banks.
5. Cash Financing
Though for many this seems untenable, cash financing is a great if not the best method. First, you can speed up transactions as you don’t have to wait for the bank to approve your loan. Second, you can negotiate for lower prices as you increase your options of people willing to sell to you.
But perhaps the greatest advantage of cash financing is that it is cheaper. You avoid appraisal costs and interest associated with most banking options.
Even as you look for financing options, don’t forget to get a property management company to assist. The two are joined at the hip.
Also, pick an option that works for you. For most, cash financing isn’t realistic, but you might have enough for a down payment. If that is impossible, then get an investment partner.