Are you looking to finance your rental property and join the increasing ranks of people in the rental property business? Well, the first thing you are going to have to do before officially becoming a landlord is to figure out financing for the property you are interested in leasing.
Wondering How You Can Finance Rental Property?
The traditional way to finance a rental property is to contact your bank, credit union, or home mortgage company and get approval for a home loan. However, with rates as low as 3.64% for a 30-year fixed-rate loan or 2.78% for a 15-year fixed-rate, now is definitely the time to invest.
That said, investing may not be as easy as it seems. Before approving any loans, most lenders require a credit score in the high 600s or better, at least 10% for a down payment. Similarly, some even require proof of substantial savings dedicated to things such as maintenance and repairs of the property. In addition, as the number of rental properties you own increases, you may find it more challenging to be approved for additional loans.
Does this leave you wondering how you can finance your rental property for the first time or continue to grow your established rental property business?
Today we will look at some of the most creative ways to finance a rental property. If you didn’t know, you could use a variety of non-traditional methods just in case your credit isn’t up to par, your savings are a bit slim, or you are looking for new ways to add to your investment portfolio.
7 Creative Rental Property Financing Ideas
If you are looking to finance your rental property, there are several ways this can be done. Keep reading as we explore seven different creative financing ideas.
- Use Current Equity
- Hard Money Loan
- Find Investment Partners
- Seller-Second
- Lease Option
- Retirement Accounts
- Loans from Friends and Family
Use Current Equity
Although not as creative as some of the other options we will discuss, borrowing against the equity in a home you already own, such as your primary residence in Columbia, is definitely non-traditional. This quick and easy way of financing a property will allow you to purchase another property and get your rental business underway.
Home equity is determined by the fair market value of your home, less the balance of an existing mortgage or lien against it. For instance, if your home is worth $200,000 and you owe $120,000, you may be eligible to use the $80,000 available equity to finance your next purchase.
This strategy is good for those who do not have a sizeable down payment. Or, it can be used as a ladder strategy to purchase additional rental properties and add to your portfolio.
Hard Money Loan
Also known as a private mortgage, a hard money loan is an easy way to bypass conventional loan processes. Sometimes qualifying in as little as 72 hours, these loans are designed to help those with credit problems qualify for a mortgage. Having fewer restrictions than a bank loan, hard money lenders usually base the loan amount on the quick-sale value of a property already owned by the interested borrower.
Although the interest rates are often higher (approximately 10-15%) with a hard money loan, this option provides those who would otherwise not be able to qualify for rental property financing.
Find Investment Partners
One good way to finance rental properties is to go in with a partner(s). Providing flexibility, more financial backing, and the knowledge of another in the real estate industry can make financing your property a breeze. Going into an investment with another person means your name never goes onto the mortgage agreement. This is especially helpful for those that have reached their loan lending limit but wish to continue to expand their portfolio.
You can enter this partnership with a family member, friend, or even a business colleague. Using this strategy, you could potentially purchase as many rental properties as you wish so long as you have a partner backing your finances.
However, it is important that you pick your partner(s) wisely because this is a business deal you are entering with another person. Therefore, there is a particular element of risk to consider and a loss of control regarding the loan process and the ownership of the property.
Seller-Second
This method of financing rental properties is done often and can be very helpful for those looking to invest. However, it’s mainly great for individuals that cannot qualify for the entire loan amount or for those who have a small down payment. The seller-second option means that the seller provides a second mortgage on the property to cover most, if not all, of the down payment required for loan approval.
The one thing to make sure of before jumping into this option is to make sure the loan you are qualifying for will allow a second mortgage to be attached to it. Although most loans do, some do not. If that’s the case, you will not be able to finance the property, and you will lose the deal.
Lease Option
Another popular creative financing option is the lease option. This allows you to get into a property, say in Elkridge, MD, with little to no down payment and provides you the option to buy the house at a later date, usually two to three years later. During this time, you will be able to get your affairs in order so that you can acquire the financing required to make the purchase investment.
Other Financing Options
There are so many creative financing options it would be impossible to cover every different scenario. However, here are some additional quick ideas for obtaining the necessary money to finance a rental property that might just work for you:
- Retirement Accounts – Although dipping into your retirement funds is not always recommended, the benefits outweigh any adverse effects for some. For example, most retirement accounts will let you borrow from yourself with a low-interest repayment plan put in place afterward.
- Loans from Friends and Family – We know that not everyone has family members with extra cash just lying around ready to be used for a rental property venture. However, for some, this is a viable option and definitely a creative one as well!
Need Assistance Running Your Rental Business?
Whether it is your first investment or your tenth, financing a rental property can prove to be difficult at times. No down payment, poor credit, lender blocks, and more can prevent you from following the path to financial freedom using rental properties.
Luckily, there is a way around traditional financing, and it takes many creative forms. So, if you are struggling to finance your rental property, or are simply trying to expand your rental property portfolio, consider using one of the non-traditional financing options mentioned above.
If you plan on financing rental properties, consider contacting Bay Property Management group for all of your property management needs. From tenant placement, lease agreements, routine inspections, and 24-hour maintenance services, Bay Property Management Group has you covered after your property is financed and ready for tenants.
Retirement Accounts – Although dipping into your retirement funds is not always recommended, for some, the benefits outweigh any negative effects. Most retirement accounts will let you borrow from yourself with a low-interest repayment plan put in place afterward.
Loans from Friends and Family – Ok, not everyone has family that has extra cash just lying around ready to be used for a rental property venture. However, for some, this is a viable option and definitely a creative one as well!
Financing a rental property, whether it is your first investment or your tenth, can prove to be difficult at times. No down payment, poor credit, lender blocks, and more can prevent you from following the path to financial freedom using rental properties.
Luckily, there is a way around traditional financing and it takes many creative forms. If you are struggling to finance your first rental property, or are simply trying to expand your rental property portfolio, consider using one of the non-traditional financing options mentioned above.
If you plan on financing rental properties, consider contacting Bay Property Management Group for all of your property management needs. From tenant placement, to lease agreements, to routine inspections and 24-hour maintenance services, Bay Management Group has you covered after your property is financed and is ready for tenants. We offer property management services in Washington DC, Northern Virginia, Baltimore, Philadelphia, and the surrounding area.
