Real estate properties can be a good investment with the right strategy and management, but it doesn't change the fact that they can cost a lot. Fortunately, there are several options you can consider for financing, all of which come with their own advantages and disadvantages.
Ways to Finance Your Investment Property
Conventional Bank Loan
This kind of loan is one of the most common financing options for real estate investors. It conforms to guidelines set by the Federal Housing Finance Agency and typically requires a down payment worth 20% of the property's purchase price. Some lenders consider other factors before setting interest rates and approving the loan such as:
- Credit Score
- Financial History
- Income
- Assets
- Debt-to-Income Ratio
Federal Housing Administration (FHA) Loan
FHA loans are issued by banks and other federal government agency-approved lenders and are insured home mortgages. You won't have to worry about a large down payment and a moderate to high credit score since they exist for low to moderate-income households.
You'll have two kinds of mortgage insurance premiums to pay, one of which is monthly and the other an upfront payment. With the considerations under this type of loan, it is ideal for people who are new to real estate investing and are looking to use traditional financing.
VA Loan
VA loans are mortgage loans guaranteed by the US Department of Veterans Affairs (VA) and are available to veteran service personnel and their surviving spouses. Some of the financial and personal benefits include lower mortgage rates, no down payments or mortgage insurance, and no pre-payment penalties.
Hard Money Loan
Hard money loans are suitable for real estate borrowers who don't want a long-term payment plan, which makes it ideal for flipping investment properties instead of turning them into a rental business since it has a slower cash flow than a one-time sale.
The loan can be approved in just days, but it'll cost you more in interest rates. The transaction is often between the hard money lender and borrower, and they use the investment property as collateral.
Private Money Loan
Private money lenders also use hard assets like real estate as collateral but also consider the financial strength. This option also offers a longer payment plan, which makes it better for investors who intend to turn their real estate investments into rentals. Most lenders can be lenient with this factor, but some may refuse to provide loans if you have less-than-perfect credit.
Home Equity Loan
Real estate investors may use another property as collateral to borrow funds for their investment property loan. It is a type of cash-out refinance consumer debt that is also known as a second mortgage. The lender would consider things like the home's current market value and the investor's mortgage balance, and has interest rates of around 10% to 18%. There are two types of home equity loans:
Fixed-rate loans provide borrowers with a lump sum that can be paid in an agreed-upon amount of time. The interest rates depend on the duration of the payment plan. The longer it takes, the higher it is.
Home equity line of credit (HELOC): HELOC is a revolving line of credit, which works like a credit card. There will be a draw period determined by the lender and the interest rate will also depend on the terms of the home equity loan.
Seller Financing
Also known as owner financing, it means that the seller can help you pay for your real estate investment. Instead of financial institutions, the seller with handle the mortgage process and will sign it with the buyer. It is often a short-term arrangement and could require a balloon payment after three to five years.
Key Factors with Real Estate Finance Options
Down Payment
Before you choose from the real estate financing options, you need to understand that some choices have larger down payment amounts than others such as conventional loans. This can be too heavy for borrowers who are purchasing an investment property for the first time or are new to investment property loans.
Rental Income
Some lenders consider estimated rental income before they approve a loan. Private loans are more likely to use this as a factor while traditional bank loans do not. Even if the monthly cash flow generated from your rental property is high, it would still be advisable to take long-term loans since the rental market can be unpredictable.
Interest Rates
Look for loans with the lowest interest rates since mortgage payments can pile up quickly in the long run. Options with the highest rates include hard money lenders since you can get financed fast. With cash-out refinance, for instance, you have a better chance of finding a lender with lower rates.
Credit Score
Your credit score says a lot about your ability to pay for your real estate investment loans. This can also determine your loan limits with conventional loans. A higher credit score means you'll get more favorable loan terms for your investment property purchase. If not, there are always options that can overlook this factor.
Real Estate Market
Prior to getting a loan, you should first ask whether the current market conditions are ideal for buying rental properties and expanding your investment portfolio. While real estate investment continues to be an effective way of producing financial wealth, you should make purchases at the right time to make the best out of your real estate deals.
Earning Rental Income Consistently Through Professional Property Management
After turning your loan-acquired real estate investment into a rental property, you have to earn rental income consistently to be able to make your monthly payments. That means having to effectively manage your business.
It can be overwhelming when you're a first-time landlord and you have loans hanging over your head. The good news is you can earn passive income as you explore other profitable businesses, and Wave Property Management can assist you with that. The first step is contacting us and we can help you with your investment plans.
