Financing is typically the hardest part of buying income properties. But it doesn’t have to be. There are many ways to finance an investment property, each with its own advantages and scenarios. So, to help you learn and choose a financing method, here’s how to finance a rental property in ten different ways:
1. Bank Mortgages
The first response you will always hear when asking “How to finance a rental property” is to use bank mortgages. Most of these loans come in the form of non-owner occupied loans, but other types, which we will discuss, are also used. Bank loans are subject to Fannie Mae or Freddie Mac guidelines. A conventional bank loan will consist of a down payment, mortgage payments, interest, and other considerations. Down payments are typically around 20% of the property price, but may uptick to 25% if you have purchased four or more rental properties with the bank. Mortgage payments are typically paid to the bank monthly, and interest rates are set in the loan’s terms. Other considerations, like six months’ worth of monthly payments in cash and a good credit score, are also required to qualify for bank loans.
2. Owner-Occupant Mortgages
Banks, and other agencies, offer investors different ways to finance a property, and owner-occupant mortgages are one of them. With these mortgages, a real estate investor buys a property as a residence, not a rental. After a year has passed, the property can be used as a rental property. The terms of the loan will not change if the property becomes a rental. Perhaps the biggest advantage owner-occupant mortgages have over non-owner occupied loans is that their interest rates are lower. They also give the real estate investor the opportunity to become very familiar with the property, as he/she must live in it before renting it out.
3. Small Community Bank Loans
A ‘closer to home’ method on how to finance a rental property is to use small community bank loans. Small banks in your local area do not adhere to the Fannie Mae and Freddie Mac guidelines mentioned earlier. Instead, their requirements are not difficult to obtain, which can make qualifying for a mortgage easier to do.
Since these banks are in smaller communities, you might have to contact lenders more often than with nation-wide big banks. The lenders will take the time to know you and what your real estate investing plans are like. If you decide to invest around your area, their help and funding is more likely to be guaranteed. So, that’s another way of how to finance a rental property.
4. Government Mortgage Programs
Is it possible to apply for programs for help on how to finance a rental property? You bet! Government mortgage programs, like FHA, USDA, and VA, can help potential investors buy rental properties for very low down payments. FHA loans, for example, can have down payments as low as 3.5%. Different types of programs can result in lower down payments. FHA’s Kiddie Condo Loans, a great tool for college student investors, have a 3% down payment.
5. All Cash
By now you might be wondering how to finance a rental property without a mortgage, or if it’s even possible. It’s definitely possible, but probably not that easy. One way to do this is to pay for the investment property fully in cash. This is much easier said than done, of course. Paying for an income property fully in cash can significantly quicken a purchase, but it can also increase the risk.
6. Owner Financing Mortgages
You don’t always need a mortgage from a bank or government programs to know how to finance a rental property. Instead, you could borrow from the sellers themselves! As weird as it sounds, it is possible to obtain mortgages from real estate investors who want to sell their properties. Everything about the loan is negotiable, which is an obvious plus. The problem is, however, that most owners are not interested in this type of financing.
7. Hard Money Loans
Most of the ways of how to finance a rental property mentioned so far are not too difficult or risky. Hard money loans are the complete opposite. Although they tend to cover huge sums of a purchase, sometimes with no down payment, they can be very risky for real estate investors. A part of their risk comes from high interest rates and fees. They also are not too easy to find. Still, if you’re looking for a loan to pay for most of the payment that is easy to qualify, and are confident you will pay back on time, hard money loans might work well for you.
8. Fix-and-Flip Loans
One type of a hard money loan is a fix-and-flip loan. This type of loan, as you may assume, is used to fund a real estate investor wanting to quickly renovate a property and then sell it (“fix” and “flip”). Like all hard money loans, fix-and-flip loans have high interest rates. As a matter of fact, the rates on these loans can be well above an astonishing 15%. And similar to all hard money loans, a fix-and-flip loan depends on the value of the property, rather than the investor’s credit.
9. Private Lender Loans
An easier way of how to finance a rental property would be to use a private lender loan. A private lender may be anyone you desire: a sibling, a friend, or a fellow investor from your real estate investing network. Everything in the loan, including the interest rate, the amount, and more, will be agreed upon by the parties involved. Private lenders are a great source of financing for a rental property.
10. Home Equity Line of Credit
The final way on the list of how to finance a rental property is to use an equity line of credit. Of course, this method works if you have equity on a property, meaning you must have a real estate property. You can then use its equity to purchase another investment property.
Recommended Reading: Can You Use a Home Equity Loan or Line of Credit on an Investment Property?
There, ten ways to finance an investment property. Even with these, there are still more possible choices out there. Want to know more on how to finance a rental property? Go to Mashvisor for a wealth of information for all things real estate!