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How to Get Real Estate Financing for Your Rental Property

rental-property-financing

When it comes to choosing the right investment, real estate is on the top of many people’s lists. However, the large expense to buy a property and potentially renovate it can seem daunting. In fact, many investors shy away from income property due to the need for so much capital upfront. But did you know there are a variety of ways to secure real estate financing? Join us below as we unlock the secrets of real estate financing and introduce you to the options that can make your income property dream a reality.

Traditional Types of Real Estate Financing

Becoming a landlord is a calculated risk but can also be a great source of passive income. The perks of owning investment property are numerous, but real estate financing can be a roadblock for some. That said, it does not have to be. Even without a large stash of cash to fund your new venture, traditional banks offer some options. There are three common types of loans used in real estate financing, and they are –

  1. Conventional Bank Loans
  2. Home Equity Loans
  3. Hard Money Loans

However, each real estate financing option and institution has specific criteria investors must meet. Therefore, understanding the terms and how these financing options work is essential to choosing the right option. So, before approaching a lender, let’s delve a little deeper into these 3 types of real estate financing below.

Traditional Types of Real Estate Financing

Conventional Bank Loans

Most investors already own their primary residence and are therefore familiar with conventional mortgage loans. That said, there are differences, including the fact that lenders expect a higher down payment on an investment property. In addition, loan applicants need excellent credit to not only get the best rate but also just to get approved.

A conventional mortgage loan is not backed by the federal government like an FHA loan is. So, instead of a 20% down payment like you would need for a primary residence, most lenders look for 30% for an investment property. In addition, higher credit requirements speak to the need for investors to have the financial well-being to pay for their current responsibilities and take on another property. Thus, lenders will carefully review the investor’s current assets and income to ensure they can afford necessary monthly payments.

Additionally, lenders prefer to see substantial savings put aside for incidentals. Typically, at least 6 months’ worth of income.

Home Equity Loans

If you currently have a home and can leverage the property’s equity, this can help finance further real estate purchases or renovation costs. This could come in the form of a home equity loan or a cash-out refinance. Depending on your individual circumstances and lender, borrowing up to 80% of the property’s equity may be possible. This substantial sum can then go towards the purchase of an income property.

However, these options do come with important considerations for investors. For example, if you refinance, it is extending the term of the initial mortgage. So, over time, owners end up paying more in interest. That said, this could be worth it if you come across a great deal surely to have a healthy profitable return.

Hard Money LoansHard Money Loans

If investors want to bypass the conventional loan process for any reason, hard money loans present a viable option. Sometimes referred to as a private mortgage, these loans are a good choice for investors with less than perfect credit. That said, with fewer restrictions to qualify comes a tradeoff for investors. Generally, interest rates on hard money loans are higher, and the loan is based on the quick-sale value of a current borrower-owned property.

Hard money loans can also serve as a bridge to gain funds quicker to close a deal until the investor can obtain traditional financing. Once the great deal is secured, refinancing using built-in equity at market value helps investors get a better interest rate and build wealth.

Not So Traditional Real Estate Financing Options

If you decide to invest in real estate, there are more options than ever to fund your venture. Often, the traditional routes do not work for every investor or are unappealing for some reason. On the other hand, some savvy investors find ways to grow their portfolios with little or no money down. So, if you are willing to get creative, check out some of these alternative real estate financing ideas below.

  1. Fixer to Fabulous
  2. Live in Landlords
  3. Skip the Traditional Bank
  4. Call on Family and Friends

Fixer to FabulousFixer to Fabulous

Not every investor wants to buy and rent out the property. In fact, for some, it is more advantageous to buy and flip, especially in the hot real estate market most of the county is experiencing in 2021.

That said, fix-and-flip loans are a short-term way to fund renovations and get the property sold for a profit. They are very similar to hard money loans in that the loan has higher interest rates and is secured by the property itself. Many investors like this type of real estate financing because they can get money faster and with more flexible qualifications. Although hard money lenders consider an investor’s financial background, the main determining factor is the property’s profit potential.

So, for investors looking for deals using fix-to-flip loans, accurate profit projection is critical. Especially since interest rates can soar as high as 15% or more, loan origination fees are high, and they require a quick payoff.

Live in Landlords

This next option is not for everyone, but it is worth considering if you are just starting out. For example, using an FHA loan to buy an investment property requires just a 3.5% down payment – far less than traditional mortgages. Often, these loans also have more favorable interest rates and terms than other real estate financing options.

So, how does this work? Well, investors purchase a multi-unit property or duplex and occupy one of the onsite units. Thus, allowing them to rent out the other unit(s) to occupants whose rent covers expenses and the mortgage payment. This is a great way to take advantage of appreciation and establish wealth and experience. However, there is the downside of being onsite and so accessible to tenants. So, carefully consider all factors before jumping in.

Skip the Traditional BankSkip the Traditional Bank

Real estate financing nowadays does not mean you have to go to a bank. In fact, you do not even have to leave your couch. Online mortgage lenders such as LendingHome, Rocket Mortgage, and SoFi have taken the industry by storm and offer many options to entice investors away from traditional banks. According to recent statistics, non-bank lenders originated nearly 50% of all mortgages in recent years.

Unlike traditional banks and their lengthy processes, investors can apply to an online lender in as little as 20 minutes. In addition, deals can close in around 14 days instead of a bank’s 45 to 60 days. This is a huge advantage for all homebuyers but especially investors looking to cash in on opportunities quickly. In some cases, these lenders will finance as much as 100% of the purchase price. So, as the mortgage industry becomes more competitive, investors win!

Call on Family and Friends

The old standby for real estate financing or any new investment opportunity is to reach out to family and friends. While getting a loan from loved ones has its downsides, keep in mind, a family loan was how Warren Buffet got started.

For driven and savvy investors, leveraging small contributions from a pool of people can help get your foot in the real estate door. Combining this strategy with an FHA loan is your best bet for starting out, thanks to the low-down-payment requirements. For example, a $150,000 property would require around $5,250 as a down payment. So, if you find five family members willing to contribute $1,000, you are well on your way to making the deal happen.

Many investors then choose to fix up the property and refinance. Thus, freeing up profits to repay family investors along with some interest.

Portfolio Management You Can Trust

Being a rental investor goes far beyond finding and purchasing a great property. In fact, some industry experts agree that after signing on the dotted line, the real work begins.

Portfolio Management You Can Trust

Income property hinges on a healthy profit margin, and in a competitive rental market, many factors can make or break your success. Therefore, many investors enlist the help of an experienced property management company to handle the daily operations of their rental business. However, hiring experts serves several purposes, including some of the ones below –

  • Freeing up owner’s time to pursue their next big deal
  • Using local market knowledge to price and efficiently market vacant listings
  • Coordinate compliance inspections and necessary licensing
  • Facilitate rent collection and maintenance requests

Rental management firms help owners maintain an occupied and profitable income property while allowing them to take on the daily stresses. The dedicated team of local property managers at Bay Property Management Group strives to provide excellent customer service to both owners and tenants. We understand how to balance tenant needs with healthy profit margins and assist owners in bridging the gap. So if you are buying your first investment property or are an established investor looking for more free time, give us a call today.