When figuring out the best way to finance an investment property, there is no right or wrong way. It all comes down to your situation and what solution makes the most sense. While taking advice is always welcome, be sure to seek out a financial advisor that will be able to advise based on your financial picture. Below, we will break down seven ways you can finance your investment property.
Conventional Bank Loan
If this is not your first home or property you are purchasing, you may already be familiar with getting a conventional bank loan. You need your credit score and credit history to be approved and have an interest rate set. Instead of a 20% down payment, 30% may be required. Also, investment properties are not included in your debt-to-income ratio. It is expected that investors have enough cash to easily cover all mortgage responsibilities for at least six months.
Hard Money Loans
With hard money loans, there are several facets to take into consideration to know if it is the best loan option. While there is a turnaround time of days to receive this loan, you face: higher closing costs, interest rates as high as 18%, using the property as collateral, and a payback schedule of a year if not less. A common factor that may or may not have you approved is the after-repair-value (ARV). These numbers help the lender predict if you will be able to repay the loan. With these parameters of the loan, it is easy to see how this type is most commonly considered a last resort.
Private Money Loans
With private money loans, you are either looking into working with family and friends or finding a lender from a Real Estate Investing event- see BiggerPockets podcast. There is infinite flexibility with the interest rate and loan term when dealing with a private loan. However, there is no safety net if payments ever default. The lender does have the power to foreclose on the property. While it may seem great going into business with a loved one, you need to consider the possible repercussions of this partnership if it were to end badly. An interest rate set with the well-known ‘family-friend discount’ may seem great, but you may rethink your partnership if you ever start defaulting on the loan and force them to foreclose on the property.
Tapping Home Equity
There are multiple ways to tap into the existing equity in your primary home: a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance. By tapping into your home’s equity, you are able to borrow up to 80% to assist in the purchase, renovations, and repair of an investment property. Which option you pick will depend on what you are looking for in terms of rate and form of repayment.
Leveraging Property
As it sounds, certain loans require you to put up collateral such as land, boats, or even your primary property to ensure that you will not defer on the loan. Since investment properties are highly risky for lenders because they are people’s ‘side projects’, lenders are strict to know they are covered all around.
Home Equity Loans vs HELOC
Home equity loans are a fixed interest rate of consumer debt. The amount that you have access to in a single lump sum of money is calculated by taking the market value of your home and subtracting it from the amount you have left on your mortgage loan.
HELOC stands apart by the simple fact that it is a line of revolving credit and not a single low. With this line of credit, you are looking at variable interest rates and funds that are accessible in an emergency. This type of home equity is tempting because there are two phases. Phase one- where you have unlimited access to your funds for 10 years and phase two- where it is now time to pay back everything you used. There is the grace that untapped funds do not generate an interest charge, however, that might not mean much when you look at the number you have to repay.
Investment Property Financing Requirements
Taking a deep dive into both the type of financing you would like to do and the requirements each have will prove vital in making the overall decision. Each form has its own pros and cons along with requirements. For instance, when looking into private loans a relationship is a huge part of attaining money. If you are looking at hard loans, you may see that the higher the ‘after-repair-value’ is, the better your chances are of not only getting a loan but one that is everything you need. While going the traditional route of the home equity loan, you will find that it is equally the strictest. The type of investment property you are looking into may help you decide which and how many hoops you are willing to jump through to secure the funds you need.
Investment Financial Survey - Grimm Realty Group's Free Consult
If you find yourself wanting to invest, but the numbers just don’t quite add up, consider asking friends and family. There is no cookie-cutter way to invest other than you need the money to do it. Don’t be discouraged if you need to start off you need to go with a condo instead of the desired beach house. Investing is a long game, and you just need to decide if and how you want to play it that will still leave you comfortable at the end of the day.
With nearly 20 years of experience, Doug is excited to help new & experienced Investment Property Owners through every step of the process. From suggesting Property Management Software to guidance on types of funding, we work with you to ensure your needs & goals come to fruition. If you’re looking to sell an Investment Property, we can provide a Complimentary Market Analysis with a full Comp report, advice on repairs & upgrades, advice on timing the sale, & the quality of local competing properties.
Schedule a Zoom Meeting with Grimm Realty Group to discuss your Investment Property needs!
Agent & Investor Partnerships Sources:
Investopedia: How to Invest in Real Estate Rentals
Forbes: How to Invest in Rental Properties
NerdWallet: How to Invest in Real Estate: 5 Ways to Get Started
SmartAsset: Beginner's Guide to Rental Property Investing
Zillow: 12 Steps to Becoming a Landlord
We are happy to answer your questions, you can contact us at any time! If we are unable to respond right away, we will contact you as soon as possible.
Questions about Your Home? Contact Us!
www.grimmrealtygroup.com Follow Us: Facebook
Grimm Realty Group Legal Disclaimer
The content on this page provides general consumer information. It is not legal advice or regulatory guidance. Grimm Realty Group may update this information periodically.
Grimm Realty Group may include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. All statistics & information are subject to change with market conditions.
Grimm Realty Group is a MN-licensed real estate Broker and does not represent you as your agent unless a representation agreement is mutually signed.
Comments