People often wonder about the best way to finance a rental property, but it will always depend on one’s financial situation. Potential investors who don’t have the cash to invest, often resort to some kind of loan agreement with a bank, entity or a person. Fix-and-flips are a good real estate investing strategy when borrowing money and needing to pay back lenders quickly.
Fix-and-flips are one of the fastest ways to gain income from real estate investments. It starts with an investor buying a below-average property that is in need of renovations. After renovating it, the investor asks for a much higher price that covers their investment, renovation costs, and a profit margin. It might sound simple but in reality, it requires experience to perfect it on all fronts. The trick is finding out the best way to finance a rental property that needs fixing.
The most common ways to finance a fix-and-flip are traditional bank financing, home equity loan, line of credit, hard money loan, or borrowing from family or friends. Each one of these options will appeal to a certain investor in a different way due to the personal and financial situation of each investor that can vary from others.
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Traditional Bank Financing
Borrowing money from the bank to finance a fix-and-flip is one of the first steps to getting stared. It is similar to any other mortgage loan agreement with a bank. The investor decides the duration of the loan and puts a down payment. If the bank agrees to those terms, then they give the investors the money needed to get a fix-and-flip property. An investor with a good credit score will find this to be the easiest and possibly the best way to finance a rental property.
Related: Tips for Getting a Mortgage for an Investment Property
Home Equity Loan
This is probably the riskiest form of loan an investor can commit to when financing a fix-and-flip. The concept of home equity loan is getting a second mortgage on your existing property while repaying the loan over a fixed time period. The major risk is that if your enterprise fails, and the fix-and-flip doesn’t generate the profit, you need to repay the loan. Your existing property is then used as collateral for failure to pay back the loan.
Hard Money Loan
Hard money lenders offer opportunities for fix-and-flip investors and developers by offering different terms than those of the bank. Hard moneylenders are usually more lenient than banks in terms of credit score evaluations. The downside of having a hard money loan is that usually these type of loans need to be repaid within a year approximately. They are also a more expensive option, because the interest rate is normally in double figures. This might not be the best way to finance a rental property, but it is an option if you are in need of a small loan and don’t have a good credit score to borrow from a bank.
Borrowing From Friends or Family
The final option is borrowing funds from friends or family. While this loan is from someone that the investor trusts, a formal, written agreement should still be used. The biggest benefit with borrowing from friends or family is that they do not always charge interest or require extra payments. The problem that many people face with these types of loans is commitment and failure to pay back the loans. Each individual wants to protect their own interests, which makes legal problems between friends and family a possibility in these types of loans.
The best way to finance a rental property can be subjective because each investor will have his or her own idea about what suits them best. If an investor is looking to make a quick profit from an investment property, fix-and-flips can do that but it requires a an investor to understand their financial limitations, risks and chances of success.
