Starting a real estate investing business has two main challenges: finding a rental property and sorting out rental property financing.
If you’re a Mashvisor user, the first challenge is not an issue. By using Mashvisor, you can easily find the best traditional and Airbnb investment properties from all over the US in no time!
Related: Finding an Investment Property: Traditional vs. Mashvisor
So, what about rental property financing? One of the best things about investing in real estate is that a property can be financed through many different means. Rental property financing should not daunt potential real estate investors. There’s always a method for rental property financing depending on one’s financial situation. To help you find out which method is best for you, take a look at the most common ways to finance an investment property.
Rental Property Financing: All Cash
The two broad branches of property financing include using all cash and mortgage for rental properties. Starting a real estate investing business with only cash is the simplest way to fund a property, provided the investor has the amount in cash. Realistically, however, most real estate investors cannot finance a property with only cash and instead depend on an investment loan, in one form or another. Still, investing in real estate with only cash can be a great idea for those able to do so.
Related: Buying an Investment Property: Cash or Mortgage?
Purchasing an investment property entirely with cash will quicken the purchase. It can also lower risk (and headaches) as opposed to a mortgage loan for rental property, which must be repaid with interest. While purchasing a property entirely in cash reduces stress, it also reduces the return on investment of a property. However, if an investor has high income and doesn’t want his/her money sitting around, using it to purchase a property fully in cash can lead to a lucrative investment.
Rental Property Financing: Conventional Mortgage
The most common form of rental property financing is through a conventional loan for investment property. These loans are provided by banks and other lenders to investors looking to purchase investment properties. A conventional loan for investment property is subject to Fannie Mae or Freddie Mac guidelines.
A conventional loan for investment property typically consists of a down payment, mortgage payments, interest, cash reserves, and other considerations. Down payments tend to be about 20% of the property price. If a real estate investor has obtained more than one mortgage loan for investment property, down payments tend to increase. For most banks, once an investor has secured more than four real estate investment property loans, the down payment rate increases to 25%.
When it comes to mortgage interest rates for investment property, there shouldn’t be much worry for real estate investors. The current interest rates are historically low, as they are hovering around 4%. Other considerations that will impact a conventional loan for investment property are credit and income. Typically, the higher these two are, the better the deal on the investment loan is.
Rental Property Financing: Small Community Bank Loans
A loan to purchase rental property does not have to come from a big, nation-wide bank. Small community banks can really come in handy when trying to secure a mortgage loan for rental property. Their requirements tend to be less strict compared to those of a conventional loan from a bigger bank.
Small community banks are great sources of rental property financing if a real estate investor plans on investing in the local area. This will make the bank more likely to accept the mortgage. If you want to start a real estate business in your local area, small community investment loans are the way to go.
Rental Property Financing: Owner-Occupant Loans
There are many types of investment loans for properties out there. One of the most beneficial types of loans, especially for investors starting a real estate investing business, is owner-occupant loans.
By definition, a mortgage loan for a rental property is a non-owner occupant loan. So, what is an owner-occupant loan? These types of loans are actually used to purchase residences. The catch is, however, that once a year has passed, the property can be used as a rental, with no change to the loan terms.
These types of real estate investment property loans are excellent for real estate investors because owner-occupant mortgages have lower interest rates than ordinary mortgages for rentals. Also, by living in the property for a year, the real estate investor can become more familiar with the property. This can lead to specific improvements and renovations that will definitely make the property stand out.
Rental Property Financing: Government-Assisting Loan Programs
Some government-backed investment loans, such as those from the FHA and the USDA, allow real estate investors opportunities for investment property financing. FHA real estate investment property loans help investors with low income by reducing down payments. The down payment can even come from a grant. These loans tend to cover more than 90% of the property price. The better an investor’s credit score, the lower the down payment on his/her loan. Real estate investors with a score of 580 can receive loans with a strikingly low 3.5% down payment. USDA loans operate in about the same fashion. They can provide no down payments for real estate investors seeking to invest in suburban and rural areas.
Rental Property Financing: Private Lenders/Hard Money Loans
Lenders, excluding those from banks, can provide funding for an investor’s property. Private lenders, ranging from professional lenders to family and friends, negotiate with real estate investors and come up with a mortgage loan for rental property. Everything about the investment loan must be agreed upon by both parties. Hard money loans work in a similar manner. These real estate investment property loans tend to cover high amount of a purchase. Unfortunately, they come with high interest rates.
Related: Financing a Rental Property: What’s the Best Way?
Obtaining a loan to purchase rental property or paying for a property fully in cash are the two mains methods of rental property financing. It does not matter which route you take. What matters is that the property is properly funded, and the mortgage loan for rental property (if taken) is repaid while not draining the investor of positive cash flow.
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