According to current real estate market research, it’s still a good time to invest in real estate properties in the U.S housing market. Deciding to buy the investment property is easy; financing the property, however, is another story. When financing investment properties, what every property investors want is to get the best methods that reduce the amount they owe, and make a profit when the time comes to sell the investment property.
So, without further ado, here are some of the best options for financing investment properties.
Financing Investment Properties – Conventional Mortgage
This is the most popular method for financing investment properties. A conventional mortgage is a loan that private entities like banks, credit unions, private lenders, or savings institutions offer. This financing method is available to everyone, but requirements vary from lender to lender and from state to state; 620 is typically the minimum credit score to obtain a loan, and 740 is the minimum score to get a good rate. A conventional mortgage also requires up to 20% for a down payment.
Because these loans require a large down payment, real estate investors are less likely to default and tend to have a more secure financial standing. In addition, the large down payment also results in lower monthly payments.financing investment properties.
Financing Investment Properties – Fix-and-Flip Loan
A fix-and-flip loan is the best for financing investment properties if the purpose of investing is to buy a cheap investment property that needs renovating, rehabbing it and then quickly putting the market for sale to earn a profit. This loan is short-term and is secured by the investment property. It allows property investors to make any renovations on a rental property, so they can quickly put it on the market and see immediate returns.
It might be easier to obtain a fix-and-flip loan in comparison to a conventional loan, but lenders will still look at your credit history. In addition, they will also want to know the estimated value of repairs.financing investment properties.
On the downside of this financing method, interest rates for these kinds of loans are high. Thus, a fix-and-flip loan is a great option for financing investment properties only if the real estate investor is sure that he/she can quickly make a profit.
Financing Investment Properties – Home Equity Loan
This type of loans is applicable when the lender uses an existing property owned by the real estate investor as security for the loan. Generally, real estate investors can get as much as 80% of a home’s equity value in a loan to buy the investment property. Lenders will give real estate investors the funds upfront, which makes them required to make a fixed payment every month.financing investment properties.
This method can be the best way for financing investment properties because real estate investors will have some collateral to back them up if their investment doesn’t work out. However, they could lose their home if they’re unable to keep up with payments. For this reason, think carefully before tapping the equity in your home for financing investment properties.financing investment properties.
Financing Investment Properties – Private Money
With private money financing, the lender is not a professional, but rather an individual looking to achieve higher returns on their cash. There is often a close relationship with the private money lender ahead of time, and they are less business oriented. This method for financing investment properties is the best for real estate investors who believe they can raise the value of the rental property over a short period of time.
Private lenders will lend real estate investors cash for buying an investment property in exchange for a specific interest rate. They establish the interest rate up front and lend the money for a specified period of time. The investment is secured by a promissory note or mortgage on the rental property, which means that if the real estate investor doesn’t pay, lenders can foreclose and take the investment property. Thus, this method for financing investment properties should only be used when property investors have multiple, clearly defined exit strategies. financing investment properties.
Financing Investment Properties – Real Estate Partnership
If a real estate investor wants to invest in a rental property, but the price range is outside of the budget, considering adding an equity partner to your team might be the best move. Real estate partnership can be a win for both parties and is very beneficial to new real estate investors. financing investment properties.
There is no specific way to structure a real estate partnership; property investors can use the partner’s cash for financing the entire property or use a partner to only fund the down payment; the partner may actively participate in nearly all aspects of property ownership or may play a passive role. There are no set rules, but each deal requires its own examination of who makes the decisions, how to split the profits at the end, etc.
An operating agreement between the partners secures the partner’s investment, not a mortgage or a promissory note like in private lending. Also, partners don’t receive an agreed upon interest rate on their money, but instead, they receive only a percentage of what the rental property generates – that includes cash flow, appreciation, and eventual profit when the rental property is sold.
Financing Investment Properties – Work with a Mortgage Broker
Working with mortgage brokers is a good idea for financing investment properties if a real estate investor doesn’t want to comparison shop by going to many different lenders. A mortgage broker is someone who applies for loans on your behalf to different lenders and compares the rates.
The advantages of working with a mortgage broker for financing investment properties are many: financing investment properties.
- Mortgage brokers have regular contact with various lenders, some of whom you may not even know about.
- A mortgage broker can steer property investors away from certain lenders with heavy payment terms hidden in the mortgage contracts.
- Another advantage is that some lenders work exclusively with mortgage brokers and rely on them to bring suitable real estate investors.
However, when working with a mortgage broker for financing investment properties, property investors should keep in mind that:
- Mortgage brokers’ interests may not align with your own, as your ultimate goal is to find a mortgage with affordable interest rate and low fees, but mortgage brokers’ goal is to get a mortgage that maximizes their compensation, which means that the real estate investor may not be getting the best deal.
- In addition, some lenders do not work with mortgage brokers at all as they find that broker-originated mortgages are more likely to go into default than direct lending. Therefore, by working through a mortgage broker, the real estate investor may not have access to these lenders – some of whom could offer property investors better mortgage terms than what they can get through the mortgage broker.
Financing Investment Properties – Conclusion
In the real estate investing business, there are many different ways for financing investment properties. As a real estate investor, you need to be able to find the most suitable and the best way to keep your rental property moving forward. Every deal is different from the next one, and a real estate investor could use different financing strategies. Thus, understanding the different options will definitely help property investors throughout their entire real estate investing career.
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