If you’re looking for a great way to make some income in addition to your full-time job (or to make enough income to replace it), you’ve probably considered starting a rental property business.
But maybe you’re feeling uncertain about how it all works. Specifically, you might be wondering what options you have when you’re looking to finance a property.
You’re in luck – our Baltimore property management team has put together this guide about the different ways you can buy a property so you can start your career as a landlord!
How Landlords Can Finance a Maryland Rental Property
Buy with cash.
The undisputed best way to buy property (and just about anything else) is with cash.
Cash eliminates the need to pay interest on loans, and seriously reduces closing costs. You won’t have to go through the hassle of paying mortgage or appraisal fees, or being assessed by lenders.
If you think you may have competition from other buyers when you’re trying to secure your new rental property purchase, paying with cash may make your offer more attractive to the seller.
Because the seller knows you won’t have to worry about your financing being denied if you have cash in hand, they can be fully confident that the transaction will go smoothly.
With cash, the process can be sped up thanks to fewer obstacles during closing and, as a buyer, you may even receive a sort of ‘cash discount’ as a benefit of saving time and effort for everyone involved.
Unfortunately, not all landlords have deep enough pockets to pay with cash. But luckily, there are many other options available.
Get conventional financing.
You can also purchase your rental property the old fashioned way – acquiring a loan by placing the property you’re purchasing down as security for said loan.
Lenders will typically require a 20 to 30 percent down payment if you take this route, and if you steadily pay your loan off at the minimum rate, you’re looking at 15 to 30 years of payments. If you want a lower interest rate (leading to a shorter repayment duration), give an even larger down payment.
The benefit of conventional financing is that you aren’t bound by government restrictions, which < href="http://homeguides.sfgate.com/fha-vs-conventional-financing-9241.html" target="_blank">may allow more room for negotiation and flexibility. You may not always be required to use the property itself as collateral, as the lender could choose to allow you to use another property instead.
If you can’t quite meet closing cost requirements, conventional lenders could increase interest rates and fund some of the costs on their own to help the buyer.
But, interest rates can be significantly higher through conventional financing. Your best bet is to determine which option is the right one for your specific needs.
Get an OO (Owner Occupant) loan.
If you choose to purchase the property as an Owner Occupant (OO), you can get the best financing terms possible and only be required to put down as little as 3.5 percent through FHA financing.
For this to work, you have to claim the property as a personal residence and live there for the amount of time the loan requires, which is typically twelve months. After you move out, the loan stays in place with the original terms and you can make it into a rental property afterward.
This is an undeniably better solution than to leave your property vacant for a long period of time. However, if you think you might have to leave your property without any occupant, you can check out this helpful blog post for tips on how to protect your investment.
Other benefits of OO loans include:
- By moving into the property yourself, you can gain a better understanding of the specifics of the property. You’ll be aware of all the existing issues and can have them addressed before you begin renting it to tenants.
- If you live in the property instead of elsewhere, you’ll be saving money by not having to make two housing payments – one for your primary residence, and another for your new investment.
- You’ll know that the rental property you’ve purchased is one that you are willing to live in. As a general rule for investors, you should never buy a property that you wouldn’t want to live in yourself.
Many real estate investors, particularly retirees, choose to use this method as a constant cycle. Buy, move in, move out, rent out, and repeat. For more information on how rental property income can help fund your retirement, check out this recent blog post!
Get a Home Equity Loan or Home Equity Line of Credit (HELOC).
If you have existing property you can use as collateral for your loan – say, your primary residence – then you can borrow up to 90 percent of its value. For some people, this immediately sets off some red flags. The idea of using something so important as the place you call home might make you uncomfortable.
However, if you view your personal property more as assets and liabilities that are constantly growing and changing, you’ll be able to get past that uncertainty and worry and begin increasing your net worth.
If you opt for a Home Equity loan, your lender will provide you with all of the funds upfront. From there, you’ll make a fixed payment containing both principal and interest over a 15 to 20 year period.
A Home Equity Line of Credit (HELOC), on the other hand, can be seen as essentially a credit card with a line amount you can charge to or borrow funds from. You’ll be billed monthly and the minimum required payment is usually interest only.
Get private funding.
Private funding is a faster process than conventional mortgage financing, and it can be a great means of expanding your portfolio.
If you’re looking to eventually own multiple rental properties, it can be extremely time consuming and costly to keep having to come up with deposits and closing costs. But, if you raise capital from private money lenders while finding those deals, you’ll have a greater chance of success in securing your investments.
What are private money lenders?
Simple – a private money lender is any non-institutional individual or organization that loans money for the interest of funding a real estate transaction. They usually aren’t established institutions whose sole purpose is to provide you with loans. Instead, you might know them personally or have some form of relationship with them.
If you don’t know of any potential private money lenders, you can use investor contact websites like Lending Club, Go Big Network, or Lendpost to contact potential third party capital investors.
Hopefully, this blog post has given you some confidence in your decision to become a landlord. As you can see, you have many financing options available. After you have chosen the right option for your situation, make sure you consistently choose profitable properties, place good tenants in those properties, and follow other landlord best practices, and you’ll be well on your way to success!
And remember – if you need help managing your Maryland properties, consider a Baltimore property management team like Bay Management Group. That way, you can stop dealing with unwanted job responsibilities and start getting the biggest return on all of your rental property investments.