It’s always a good time to invest in real estate. No matter if you are working part-time or full-time, real estate investing can be a great way to generate positive cash flow and secure your future. Deciding to invest in a property is easy; the hard part is investment property financing. For beginner real estate investors, money will always be a challenging hurdle and many will start to fear that investing in real estate is somewhat impossible for them. Don’t worry, I’ve come to console you and share with you easy methods for investment property financing.
Investment property financing methods:
1. Conventional mortgage loan
Applying for a conventional loan has become a popular method for investment property financing among investors. A mortgage loan is offered from private entities like a bank, private lenders, or savings institutions. Mortgage loan requirements differ from one lender to another but anyone can apply. Qualifying for the loan depends on each lender’s requirements. Some lenders will say that a good credit score is needed to obtain the loan (typically a 600+ credit score is considered good). In addition, conventional mortgage loans require a down payment of at least 20%. The benefit of paying a large down payment is that it results in lower monthly payments.
Related: Tips For Getting a Mortgage for an Investment Property
2. Fix-and-flip loan
If your real estate investment strategy is to buy cheap investment properties and quickly put them on the market, then a fix-and-flip loan is what you need. This method for investment property financing is great for investors who want to buy properties below market value that need renovating and quickly sell them to get immediate returns. Fix-and-flip loans are short-term and are secured by the investment property.
The requirements for this loan may not be as complicated as a mortgage loan, but lenders still need to look at your credit score. So make sure it’s a good one! Lenders for this loan also need to know the estimated amount of repair cost that is needed for the investment property. Interest rates for this type of loan are high, so only choose this option if you’re sure you will quickly make a profit.
3. Home equity loan
Home equity loans are a good method for investment property financing because real estate investors can get up to 80% of a home’s equity value in a loan to buy the investment property. With these loans, the lender uses the existing property owned by the real estate investor as security for the loan. This type of loan can be good and it can be bad. Since the loan is given upfront, real estate investors are required to make a fixed payment every month. So it’s bad because investors could lose their home if they are unable to keep up with the monthly payments.
4. Private money lenders
Private money lenders are not professionals but rather people who are looking to invest in a property to achieve higher returns on their cash. They are just as interested in investing in the property as you are. This type of investment property financing is less formal than other methods. Basically, the lender will lend investors the money in return for a specific interest rate that is agreed upon upfront. If for any reason the real estate investor doesn’t pay, the lender has the ability to foreclose and take the property. This method is best for investors who believe they can raise the value of the rental property over a short period of time.
5. Seller financing
Seller financing is when the seller of the investment property agrees with the buyer to provide the financing in order to close the real estate deal. They write like a form of contract where they agree on the number of monthly payments, interest rates, payment schedule, and the consequences if anything were to happen. This investment property financing method is hard to come across because it requires that the seller owns the property clear and free. It’s hard to find a seller whose property doesn’t come with some existing mortgage payment.
Related: Owner Financing: Is It the Best Way to Finance an Investment Property?
6. Real estate partnerships
From its name, you know that a partner is involved. Many new real estate investors want to invest in rental properties but they don’t have the money. That is why most of them turn to this investment property financing method. The good thing about real estate partnership is that there is no strict structure to follow. The partner can be as actively or passively involved in the investment property and you can use the partner’s financing to cover the entire property or to cover just the down payment. All the roles are discussed between you and your partner. The agreement that is made between the partners secures the partner’s investment. Both parties receive a percentage of what the property generates. This includes cash flow, appreciation, and profit when the rental property is sold.
7. Cash financing
I saved the best for last. For many, this type of investment property financing method might seem impossible because not everyone has substantial capital lying around. But for the lucky ones who do, this method is great. It’s quick and simple and there are very little complications involved. Plus, you get a lot of advantages like getting more offers accepted and speeding up the purchase process. You also have the power to negotiate for lower property prices and save on interest and increase your cash flow. To estimate your future cash flow, you may use an Airbnb calculator.
Related: Buy a Rental Property Using a Mortgage or Cash?
Out of these 7 methods for investment property financing, at least one should suit your situation and get you on the right path to buying your first investment property. But before I leave you, I want to quickly give you some investment property financing tips that you should always keep in mind.
- Save up for a sizeable down payment: Saving as much money as you can for a sizable down payment is always a plus and will give you a great advantage when you apply for a loan. Remember that the minimum down payment is 20% of the property’s price.
- Check your credit score: Always make sure your credit score is good. You don’t want anything below 600 and the higher your credit score is, the better chances you have of qualifying for a loan.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
- Don’t resort to big banks: Try applying for loans from banks in your local area. Banks in your location know the area you are investing in and will help you determine if your investment has a chance of succeeding or not.
- Look at your debts: Before buying an investment property, you should get your finances in order and look at your debts. Ask yourself how much is my income vs. how much is my debt. Your debt should not consume a lot from your income stream. If it does, then you should consider paying off your debts before making any type of investment.
Related: How to Get Your Finances in Order Before Buying an Investment Property
A final thought
Buying your first investment property is not an easy task especially if you don’t have a financing strategy to help you out. There are many methods for investment property financing that can ease the purchasing process for you as I mentioned above. Be sure to check out Mashvisor for the best investment strategies that will help you make smart investment decisions.