Real estate investors are always looking to find their next investment property and the best way to finance it. Luckily, there are several options for investors to explore. If you want to expand your portfolio, this blog post is for you! Today, we’ll discuss nine investment property financing strategies for your next rental property and some tips and tricks for each strategy.
Key Takeaways:
- Investors can choose from diverse investment property financing strategies such as cash, conventional loans, home equity loans, private funding, crowdfunding, and more, each with unique advantages and considerations.
- Utilizing assets like home equity (HELOC) or cash-out refinancing allows investors to tap into the value of properties they already own to finance new investments.
- The best financing method depends on the investor’s strategy, whether it’s long-term holds, short-term flips, or expanding a larger portfolio. Options range from fixed-rate loans to commercial real estate loans and owner financing.
9 Investment Property Financing Strategies
Whether you self-manage your investments or use a Baltimore property management company, you may consider buying more properties to increase your income. That said, finding the right financing method is important if you want to expand your investment portfolio. Here are nine investment property financing strategies to consider, from using cash to buy it outright to using the equity you have in an existing property.
- Cash
- Fixed-Rate Conventional Loans
- ARM Rate Conventional Loans
- Home Equity Loan
- Cash-Out Refinance
- Private Real Estate Funding
- Crowdfunding
- Owner Financing
- Commercial Real Estate Loans
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.
This method of purchasing an investment property allows 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 the greater potential for unexpected expenses.
Fixed-Rate Conventional Loans
Conventional real estate loans allow lenders to use the property you purchase as collateral to secure the loan. A traditional loan typically has lower monthly payments but also usually comes with a larger down payment. In most cases, investment properties tend to have more difficult qualifications concerning income and credit versus purchasing your primary residence.
With conventional real estate loans, you can typically 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.
ARM Rate Conventional Loans
Adjustable-rate mortgage loans can be an excellent method of financing if you are flipping a home to sell again or plan on holding on to it for only a few years.
ARM loans start at a lower rate, and their interest rates will adjust with time. With the current market instability, you may pay more if you take out an ARM loan for a property you intend to hold onto for a longer period.
Home Equity Loan
This type of loan allows you to use another property—typically your primary residence—as collateral to borrow funds for your investment property purchase.
A HELOC loan typically works similarly to a credit card. The lender will give you a line of credit and allow you to adjust and borrow funds from that line. Remember, you will typically pay the interest on the loan amount you borrowed.
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, where you just use 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.
For example, say you own a home valued at $400,000 and only owe $100,000. You want to buy an $80,000 rental property that may not qualify because it is in poor condition. You could potentially pay off your current $100,000 mortgage, borrow the additional $80,000 (plus potentially other expenses), and end up with a new first mortgage on your primary residence for $180,000+/-.
Private Real Estate Funding
Companies and individuals are willing and able to provide private funding for real estate investments. One example of private funding is going through a hard money lender. Borrowers’ biggest issue with private funding or hard money loans is the higher interest rates and typically short terms available.
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. That said, be careful whom you ask to ensure that you don’t lose valuable relationships if the deal goes south.
Often, the best sources for real estate investment funding can come from other investors. They are often willing to look at deals and help with the financing in exchange for either higher interest rates on their investments or potentially a portion of the profit at the end of the transaction.
This is usually not a long-term solution, and for most investors, it is a way to get “into the game” before they have the qualifications for bank-funded financing.
Crowdfunding
Real estate crowdfunding is very similar to private 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, 10-20 people invest between 5% % and 10% of the investment.
There are several legitimate crowdfunding sites online. Many of these sites are open to various real estate investment types, and others specialize in real estate investing. That said, expect to have a professionally prepared business plan and specs on the property and any needed repairs or renovations.
Most of these loans are very short-term commitments—many less than 12 months—so be prepared to demonstrate how you are going to pay the lender(s) back, as in the private funding scenario.
Owner Financing
Some owners will offer to help finance homes they are selling because they would rather have a steady flow of monthly payments vs. one lump sum.
That said, 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.
Commercial Real Estate Loans
As you develop a more substantial portfolio of properties, some of these options may be depleted. For 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 allow up to 4 financed properties.
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.
Manage Your New Investment With Ease
If you’ve chosen one of the above investment property financing strategies to expand your portfolio, you may wonder how you’ll manage it all. After all, expanding beyond one or two rental properties can become stressful. You must consider marketing them, finding tenants, collecting payments, and performing maintenance. But what if you didn’t have to worry about all those things?
Need More Advice? contact us today!
With Bay Property Management Group, you don’t have to! Allow our team of experienced property management professionals to handle it for you. We offer comprehensive rental management services throughout Baltimore, Philadelphia, Northern Virginia, and Washington, DC. Contact us today to learn more!
