Real estate is one of the most stable investment options today. Unlike stocks or cryptocurrencies that can fluctuate wildly, rental properties are generally more dependable. However, breaking into the industry isn’t as easy as the property brothers might make it seem. On the contrary, real estate is a capital-intensive venture that requires a lot of forethought to fund.
We’re discussing the top 8 strategies to finance your rental property purchase. Additionally, we’ll share some tips on coping with rising interest rates and the risks involved in real estate.
8 Financing Options for Investment Properties
As the saying goes, cash is king. If you have a hefty savings account, the benefit of paying for a house upfront is you can close the deal quickly. Also, you start earning profit from your first rental check. Although, it is a significant one-time investment that would greatly dwindle your cash reserves.
2. Conventional Mortgage
A bank loan remains one of the most popular ways to finance the purchase of a house because of its wide availability. You can enjoy favorable rates and low fees for a small downpayment with a good credit score. That leaves a smaller cash commitment that you can put towards other investments.
3. FHA Loans
An FHA loan might be a good option if you don’t mind living on your rental property for at least a year. The Federal Housing Administration offers mortgages to investors to purchase, build, or renovate a property that increases available housing. Besides living on the premises for a while, their requirements are typically less competitive than conventional loans.
4. Seller Financing
You can negotiate more flexible terms with the rental owner. If the seller is willing, you can set up an agreeable arrangement that transfers ownership without a third party. If you manage your investment property wisely, you can seek a more traditional financing method that will enable you to pay off the owner sooner. Although this type of financing is harder to find since it requires a willing seller and that the house is free and clear.
5. Home Equity Line of Credit
This option is an excellent choice for homeowners. If you already have a free property, you can use it as a downpayment for another one. In other words, you’ll borrow against the home’s value to purchase a new investment. The limit is around 80%, with lower interest rates than conventional bank loans.
6. Portfolio Loans
Portfolio loans are ideal for investors looking to buy multiple properties. This arrangement lets you finance more than one unit under the same loan, enabling you to expand your rental business quickly. The drawback of this method of financing is that it has higher rates and fees.
7. Secured Loan
A secured or hard money loan involves using the property as collateral. That means you could lose the rental and all your investment if you miss too many payments. While that sounds risky, it’s ideal for borrowers with limited funds and low qualifications. This method requires less scrutiny, less paperwork, and lower interest.
8. Private Loan
Finally, as the name implies, a private loan is financed by individuals. Instead of trying to meet the high requirements of a bank, you can negotiate with a trusted partner or private lender. While this method is often more flexible and easier to get, they’re also more expensive.
How to Deal with Rising Interest Rates
● Keep Cash Handy
Having a reserve of money prevents you from being strapped for cash. When you have limited funds, you also have limited options. Thus, you might have to sell off some properties in a bad market in an emergency.
● Opt for Flexible Loan Options
The more flexible a loan option, the better it is. The last thing you want is to be stuck with unfavorable terms and no way to escape. The real estate market can change quickly, and you should be able to adapt accordingly.
● Use Variable and Fixed Rate Debt
Get the benefits of both types of rates to make the most of the situation. Variable rates are usually cheaper in the first few years before ballooning. However, if you refinance with a fixed-rate debt on time, you can still maintain your leverage.
What are the Risks
● Purchasing a Money Pit
One of the risks of investing in real estate is buying a money pit. Due to structural issues, pests, or mold, a lousy property can drain cash in repairs. Hence, it would help if you prioritized property inspections before any purchase.
● Low Liquidity
A reoccurring issue with real estate is that it offers investors low liquidity. It’s generally a long-term game, and to see the most value for your money, you have to be patient.
● Long-Term Debt
As we highlighted earlier, real estate is capital-intensive. Most of the financing options we’ve listed here require you to service a loan for 10 years or longer. Thus, not every investor is comfortable accumulating such debt for so long.
One of the most common myths about real estate is that you have to be a high earner to invest in the game. However, cash is one of the top 8 strategies to finance your rental property purchase. Still, there are several other options available to investors. You have to find what works best for you.
About the Author
Bay Property Management Group is a full-service property management company that offers top-notch service throughout Baltimore, Washington DC, Philadelphia, and Northern Virginia. Offering over 12 years of industry experience and a highly qualified team of property managers, leasing professionals, and maintenance technicians.