8 Tips and Tricks for Financing Investment Property
- Posted by Sunil Bhirani
- On January 24, 2021
Investing in real estate is one of the best ways to build wealth and generate passive income for a long time. While it is more work upfront, investment in real estate can provide far greater returns than conventional investment accounts.
Once you identify the type of real estate investment you’d like to pursue, it’s time to find your funding. There’s no point in looking for your first or next investment property until you have the money in place.
However, most people don’t pay cash for their investment properties; there’s no need. There are many financing options that exist today for real estate investors. Read on to see which option could be your next funding source.
1. FHA Loans
FHA loans make incredible investment property loans for new investors. With FHA, you are only required to put 3.5% down instead of the standard 20%. That could be tens of thousands of dollars you don’t need to have upfront.
But note: FHA loans are only available for owner-occupied buildings. To qualify for this loan, you will need to buy a property with 2-4 units and live in one of the units for at least one year.
FHA generally accepts those with lower credit scores as well. If you are still in the credit-building process, this may be one of your only options.
2. VA Loans
VA mortgages are for those actively serving in the military, veterans, or surviving spouses of military members. They do not require a down payment and the investment property interest rates are kept low. However, they do require you to occupy the home for at least a year.
You can use VA loans to acquire a new property each year until reaching your entitlement limit. And for those who plan to buy a multi-unit property, you can use the rent from your units as additional income to qualify for the loan.
3. Conventional Mortgage
Of course, if you are in a position to do so, you can always get a conventional mortgage. With a conventional mortgage, you will pay at least 20% down to acquire the loan. Many investors appreciate the initial equity they have in their investment properties when putting 20% or more down.
As a result, interest rates are generally lower than low down payment loans. Plus, programs like FHA require you to pay an additional fee known as PMI, or private mortgage insurance. With a conventional mortgage, paying at least 20% down, you will not have to pay this.
4. Hard Money Loan
For investors focused primarily on flipping houses, hard money loans can provide a good option. Hard money loans are not supplied by banks, but by individual investors or companies.
Loan applications are based on the real value of the property, not of the borrower. These loans and investments are considered higher risk.
As a result, interest rates are much higher, averaging around 11.25%. These are designed to be short-term loans, ranging from 36 months to 3 years.
Investors can also access hard money financing much quicker than conventional or bank financing. Since the property to buy is the collateral, there is a much shorter application and approval process.
HELOCs, or home equity lines of credit, give you the opportunity to use your equity in order to finance your next investment. You can get a HELOC on your primary residence or another property you own, so long as there is enough equity to access.
HELOCs are more like a credit card than a mortgage or traditional loan. They are revolving lines of credit. Once approved, you can use your equity when and how you want to make purchases or investments.
They also have variable interest rates. Your monthly payment depends on your current balance and the current interest rate.
You can typically use a HELOC freely for up to 10 years. After your draw period ends, you can no longer spend.
You are instead required to pay back your balance. Your balance becomes amortized and you pay this off over time.
6. Crowdfund Your Property
Real estate investment provides incredible returns. Many people would like to enjoy a portion of these returns without having to do the work of obtaining a property, renovating it, and renting it out.
There are many real estate crowdfunding platforms that allow you to share your next deal with pools of investors. They then invest in your deal, and you pay them a return.
Groups of investors each invest an amount they feel comfortable with until you reach your funding goal. It’s never been easier to share the joy of real estate investing with others.
7. Private Investors
If financing through a bank, a lending company, or through a crowdfunding platform doesn’t work for you, you can always find private investors. With a private investor, you can negotiate a deal that works for both of you.
Lots of people are sitting on mountains of money, waiting for better ways to invest it. If you can provide an excellent deal (and ideally a solid track record), you can likely find private financing.
It helps to join networking groups in order to find potential investors. It would also help to have experience investing in real estate first. Once you find a private investor who trusts you, you may have consistent access to funding.
8. Owner Financing
When you find a good deal, you can always try to bypass the funding process altogether by asking the owner if they will finance the house themselves. With owner or seller financing, the owner acts as the bank and you pay them monthly.
There are many different ways to structure a seller-financed deal. The issue is that seller financing doesn’t work unless the seller owns the property free and clear. If they have a mortgage or other financing on the home, it’s not an option.
As a result, investment property sales with owner financing is rare. But if you can make it work, it can be an incredible option for both parties.
It’s Time to Get Your Next Investment Property
Now that you have 8 different funding options to try, it’s time to move towards your next investment property. There are amazing property deals waiting for you all across the country.
It’s time to start building your portfolio. If you’d like to get an alternative loan for your next rental property investment, apply online today for fast, hassle-free approval.