Financing a real estate investment property is a major concern for many beginner property investors. Understanding the different investment property financing options is important to determine which one works best, which is a key to a successful real estate investing career. Here are the 4 most efficient investment property financing methods.
Investment Property Financing – Mortgage
Getting a mortgage is the most common investment property financing option for property investors – it’s a bank loan especially for real estate investing. Property investors go to a bank (or a mortgage broker) and apply for a loan which requires them to put a down payment. Generally, most lenders require a minimum of 20% of the income property’s purchase price as down payment. For example, to finance a $100,000 income property, a real estate investor would only have to put down $20,000 in cash, and the mortgage will cover the remaining $80,000.
Investment Property Financing – Private Money
Private money lenders are people you know whether as a friend, a family member, and even a colleague or co-worker. This method of investment property financing comes with fewer formalities between the lender and the real estate investor. Additionally, it doesn’t have strict conditions – interest rates are often low, and the length of the loan is fixable and negotiable due to the personal relationship between the lender and the real estate investor.
Investment Property Financing – Hard Money
Hard money lenders are professional individuals or companies that lend money specifically for real estate investing. Although this is a good investment property financing option, it comes with a lot of formalities, documentation, and guarantees. The best thing about hard money lenders is that once property investors are approved for a loan, it’s only a matter of days to get the money. However, this investment property financing method is a short-term loan (up to 36 months only!) and requires higher interest rates. This is why hard money is not suitable for financing just any type of investment property. For example, it makes sense to finance a fix-and-flip with hard money, but not a long-term residential property since it would be impossible to pay off the loan in only 3 years.
Investment Property Financing – Seller Financing
This investment property financing method is like taking a loan from the seller of the income property instead of a bank! In simple terms, seller financing is another financing option for real estate investing in which the seller of the income property agrees to provide financing to the buyer in order to close the real estate transaction. This doesn’t mean that the seller hands over cash to the income property buyer. Instead, the seller extends a kind of credit, and the income property buyer makes monthly payments.
Whichever real estate investment property financing method you opt for, remember that what works for one real estate investor and for one investment property won’t necessarily work for another. Make sure you evaluate your financial standing, conduct a financial analysis, and understand all requirements and outputs of each method before deciding how to finance your investment property.
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