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9 Different Investment Property Financing Strategies & Ideas

Property Financing Strategies

Real Estate investors are always looking to find their next investment property and the best way to obtain financing for it.

If you are a real estate investor, here is a quick list of 9 different ways to finance your next real estate rental property and some tips and tricks for each strategy.

Ideas on How To Get Investment Property Financing

  1. Cash: Cash is the easiest method to purchase any type of investment property. However, if you are starting out in the real estate rental game, you probably won’t have the cash built up as you would if you have been investing in real estate for years.
    1. This method of purchasing an investment property will allow you to finance the home no matter its condition. Some real estate lenders will not finance homes that are in very poor condition due to the potential risk of assessing the repair costs or greater potential for unexpected expenses.
  2. Fixed Rate Conventional Loans: Conventional real estate loans allow the lender to use the property you are purchasing as collateral to secure the loan. A conventional loan will typically have lower monthly payments, but it also usually comes with a larger down payment. In most cases, investment properties tend to have more difficult qualifications concerning income, credit versus say purchasing your primary residence.
    1. With conventional real estate loans, you are typically allowed to count a portion of your estimated rental income toward your monthly cash flow, so in most cases, you can count up to 70% of the gross rental income toward the mortgage payment.
  3. ARM Rate Conventional Loans: ARM loans can be an excellent method for financing if you are flipping a home to sell again, or you are planning on holding on to the house for only a few years.
    1. ARM loans start at a lower rate, and their interest rates will adjust with time. (Adjustable Rate Mortgage) With the current market instability, you may end up paying more if you take out an ARM loan for a property you intend to hold onto for a longer period.
  4. Home Equity Loan: This type of loan allows you to use another property – typically your primary residence – as collateral to borrow funds to use for your investment property purchase.
    1. A HELOC loan typically works similar to a credit card. The lender will give you a line of credit and allow you to adjust and borrower funds from that line and you will typically pay the interest on the amount of the loan you have currently borrowed.
  5. Cash-Out Refinance. This is just another way to get money for your investment property from another home you already own. This is very similar to the “Conforming” example above just using your primary residence or second home property as collateral to purchase the new investment property. By doing a cash-out refinance, you are essentially paying off the house you are getting the refinance on, and using that money to purchase your new investment property.
    1. An example of this would be you own a home valued at $400,000, and you only owe $100,000 on it. You want to buy an $80,000 rental property that maybe doesn’t qualify because it is in poor condition. You could potentially pay off your current $100,000 mortgage and borrow the additional $80,000 (plus potentially other expenses) and end up with a new first mortgage on your primary residence for $180,000+/-.
  6. Private Real Estate Funding: There are companies and individuals out there that are willing and able to provide private funding on your real estate investments. The biggest issue borrowers have with private funding is the higher interest rates and typically short terms available.
    1. Private funding is typically a more person-to-person transaction and can offer a relationship of sorts with the lender. Many people suggest starting with your circle of family and friends. Many times, family and friends may not have the extra cash available to help you fund your next big opportunity. Be careful whom you ask, to ensure that you don’t lose valuable relationships if the deal goes south.
    2. Often the best sources for real estate investment funding can come from other investors. Many times they are willing to look at deals and help with the financing for either higher interest rates on their investments or potentially a portion of the profit at the end of the transaction.
    3. This is usually not a long-term solution and for most investors is a way to get “into the game” potentially before they have the qualifications for bank-funded financing.
  7. Crowdfunding: This is very similar to private real estate funding however the risk can be carried over across many investors vs. the more typical situation of one person loaning 100% of the real estate investment amount in a more typical crowdfunded transaction you would have 10-20 people investing between 5%-10% of the investment.
    1. There are a number of legitimate crowdfunding sites online. Many of these sites are open to a large number of different real estate investment types, and others specialize in just real estate investing.
    2. Expect to have a professionally prepared business plan and specs on the property and any repairs or renovations needed.
    3. Most of these loans are very short-term in commitment – many less than 12 months – so also – as in the private funding scenario – be prepared to demonstrate how you are going to pay the lender(s) back.
  8. Owner Financing: Some owners will offer to help finance their home they are selling because they would rather have a steady flow of monthly payments vs. one lump sum.
    1. Many times seller financing is often a short-term arrangement that requires a balloon payment 3-5 years out to ensure that eventually the buyer gets permanent financing and the seller gets paid in full.
  9. Commercial Real Estate Loans: As you develop a more substantial portfolio of properties some of these options may get depleted.
    1. An example most conforming lenders will only allow a certain number of Rental/Investment Properties per person. Currently, FNMA (“Fannie Mae”) only allows up to 10 financed properties (including your Primary and Second homes) however many lenders will only go up to 4 financed properties.
    2. Most “bank” financing or conventional lending will also max out at any property with more than four units in it. So if you find an apartment building with six units, you would likely be looking for commercial or specialty financing from the start.