Beginner real estate investors can run into a lot of different obstacles when buying rental properties. It’s one thing to find the right investment property in the best location. It’s another to start thinking about a budget and a financial plan: basically where the cash for your real estate investment property is going to come from. Well, financing rental properties doesn’t have to be an obstacle.
The best way to get started is with the knowledge about all of the options for financing rental properties. If you have a better idea of your options, you can start saving and planning for financing rental properties with little worry.
Conventional Bank Loans
A conventional loan is a loan that is available to you through private lenders: banks, mortgage companies, or credit unions. What does it take to get approved for this kind of loan? Well, the lender will be interested in your credit score and credit history. Besides just getting approval, a lot depends on how good you have been at borrowing and paying off debts in the past: the monthly mortgage payments, the period to pay, and the interest rates.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
Lenders will also look at your current income, assets, and any current mortgage you may have. They want to see if you will have the cash flow to be able to pay for financing rental properties. This will only include your current income. You can’t include any potential rental income from positive cash flow that you figure the rental property will get you.
As a beginner real estate investor, you should also know that this kind of loan will require a down payment. Some lenders will require 20%, while others may go as high as 30% because investment properties are considered a risk. Before you apply for this kind of loan, create a budget for your personal finances and save up the cash, so financing rental properties will go smoothly a few months down the line.
Are you opting out of being a landlord and renting to tenants altogether? If you want to invest in a house, just to repair it, and get it back on the market, then there is a specific loan that you have to be aware of: the fix-and-flip loan. To qualify for this loan, you don’t have to be as credit-worthy as with a conventional bank loan. While lenders will still look at your credit history and income, this loan depends mostly on the value of the investment property itself. Looking at the after-repair-value of the rental property, lenders will determine if you will be able to afford the mortgage payments.
You could get qualified for financing rental properties in a matter of days with the right investment property. An investment property calculator can help you determine the value of an investment property before you apply for this kind of loan. Look into Mashvisor’s investment property calculator to help you determine if a real estate property will give you enough of a return to support you when applying for a fix-and-flip loan.
Related: An Investment Property Calculator is a Must. Read Here Why.
There are a few negative points to a fix-and-flip loan: it is short term, sometimes less than a year. The interest rates also tend to be higher than with conventional loans as well as the origination fees and closing costs. But, if you’re looking to profit quickly from an investment property rather than depend on monthly rental income, this could be the real estate investing route for you.
You might be a beginner real estate investor, but do you already own a home? If so, you can borrow against the equity of that home. Many lenders will let you borrow up to 80% of home equity to go towards financing rental properties. There are three types of loans for home equity.
Home Equity Loan
To qualify, lenders will make sure you have the ability to pay by reviewing your income and credit history. They will also look at the original mortgage you had for the house and the value of your home that is available.
If you do qualify, you’ll get cash up front. From there, it works like a conventional bank loan where you will have a fixed monthly payment which is typically interest only (the rate may be variable). This kind of loan usually has a long payment period: 15 to 20 years.
Home Equity Line of Credit (HELOC)
While home equity loans are similar to conventional loans, HELOC are similar to a credit card. You will be given a credit amount which you can then charge to or borrow from. HELOC will have you paying monthly with interest as well. Qualifying for this line of credit requires the same things as a home equity loan.
This route requires similar steps of application and qualification as a conventional bank loan. A cash-out refinance will pay the existing debt you have on your current property, and then a new mortgage is created. The difference is paid to you as “cash-out.” It has a fixed rate, but you might end up paying more in interest than your original mortgage.
Some real estate investors go about financing rental properties through seller financing. This is an option when you don’t qualify for traditional loans. The idea is that the seller of the house basically takes the place of the bank: you take over ownership, but you’ll pay monthly installments to the property seller.
A property seller will be willing to go down this route with you if you set a financial plan forth as well as investment strategies for positive cash flow to let him/her be confident in financing you. If you fail to comply with the agreement, the property seller can take the house back, in the same way a bank can if you don’t pay off your mortgage loans.
Whether you seek out one real estate partner or look for a few investors to team up with, multiple investors financing rental properties together is an option. In this way, if you have half or a third of the investment, you can forget about loans from banks and waiting for approval. You can buy the investment property and start profiting right away. Buying rental properties comes with a lot of risks, and, in this way, it won’t all be on your shoulders.
Tread carefully when choosing your real estate partners. It should be someone you can trust who is on the same page as you in terms of a real estate investment strategy and a financial plan. Enlist a real estate lawyer to draft up any needed legal documents and make sure you don’t fall into any of the traps of real estate partnerships.
Related: What You Need to Know about Real Estate Partnerships
Real Estate Crowdfunding
Crowdfunding is a relatively new concept that showed up with social media for financing rental properties. What real estate crowdfunding essentially does is to use social media networks to get the word out about investment opportunities. There are a few different real estate crowdfunding platforms that you can look into, and each has its own rules and regulations of how it works.
Generally, when investing in real estate through crowdfunding, you’ll be taking on a loan that the investors on the platform will finance. Alternatively, investors take a part of the equity on the investment property. For this, you will have to give them a return on investment if you sell or from the positive cash flow from rental income.
If you are a beginner real estate investor, this route for financing rental properties may not be the best option. This is because real estate crowdfunding takes a lot to qualify, including a history of good investment choices. But it is an option to keep in mind as you grow your real estate investment portfolio and want new ways to finance investments.
Related: What’s all this real estate crowdfunding?
Financing rental properties doesn’t have to be an obstacle; you have plenty of options to consider. If you know your options, you’ll be able to plan ahead to make sure you can easily qualify for the financing. Just because you don’t have tons of cash in hand, it doesn’t mean you can’t start investing in real estate today!
For more advice on all aspects of real estate investing, keep reading on Mashvisor.