Buying a rental property as an investment can allow you to earn a capital return and a rental income, as well as take advantage of certain tax benefits. But it can be risky. Here are 14 of the best finance options when buying a rental property that could help you mitigate those risks.
A major perk of pooling funds from private investors is that you will usually be able to combine it with different financing forms, like putting it toward rental property mortgage from an online lender. In fact, for a lot of real estate investors, procuring funds from family, friends, and acquaintances is the ultimate goal. Since this approach takes time—and trust—it may be a good idea not to rely on investment property financing this way, at least initially.
Lease options are highly popular and creative options for financing because they provide the opportunity to invest in a property with almost no down payment. Lease options also give you a chance to purchase the property eventually, typically two or three years later. This gives you a greater chance to get the necessary financing to make the purchase investment after you have your financial affairs in order.
Portfolio lenders can make reliable financing partners if you’re looking for residential or commercial investment property loans. One advantage is receiving tax deductions if you are a landlord; however you will need to report your income in order to provide tax returns to lenders. In this instance, it is important not to misreport to the IRS, because it could hurt your chances of getting a rental property loan even if you do not get caught.
Conventional mortgage lenders are a great option especially for your first rental property loan, since they generally have more credit guidelines. For instance, your rental property mortgage appears on your credit report because conventional mortgage lenders nearly always report to credit bureaus. That is not necessarily a bad thing for your first or second mortgages, but it could be tough to get a lender on board if you have more than two mortgages appear on your credit report.
Online rental property loans
Online rental property loans are a good alternative to conventional mortgage lenders because while the lender fees and interest rates are usually comparable, the lenders can usually settle more quickly and the majority to not report to credit bureaus.
If you can negotiate it, seller financing is a decent funding technique—but it is not especially reliable. Seller financing is when you purchase a property to turn into a rental and send the seller monthly payments, thereby becoming a source of income for him or her. While this may not always be the best option, when it works it works. Try speaking with the seller directly to gauge their reaction rather than speaking through an intermediary realtor.
Hard money loans are usually high in cost but are easier and faster to get than through a bank. The reason for this is that hard money lenders do not usually need financial information from you the borrower, lending money based on the value of real estate. It should be noted, however, that hard money lenders do tend to charge higher rates. Basically, a hard money loan will work best for you if you are looking to settle sooner than later and want to avoid the headache of too much red tape.
Using lines of credit against other properties is a great way to get affordable and flexible financing for new investment properties. You can borrow a home equity line of credit, or HELOC, from traditional lenders; if you are searching for a lower interest rate, there are online businesses available. One of the advantages of using lines of credit against other properties is they can free up money to make larger down payments or payment in full. Then, after the new property has been renovated, i.e., has better equity, you can refinance it and pay off the initial HELOC.
For fix-and-flip deals, crowdfunding websites are a good option for short-term financing. While it is usually a better option than a hard money lender, for instance, you should be prepared to pay 8% to 10% interest rates and 10% to 20% as a down payment. Crowdfunding works best for short-term bridge financing, it should be noted, and is less commonly used for long-term rental property loans.
Using your retirement accounts might not always be the ideal finance option when buying a rental property, but occasionally the negative impacts are outweighed by the benefits. The major advantage of utilizing retirement accounts is that you can borrow from yourself on a low-interest repayment plan.
A personal loan does not require you to put your home up as collateral. In fact, you usually are not required to put up any collateral whatsoever. You also wind up paying much less interest in the longer term because the repayment term is often far less short than a mortgage loan, typically somewhere between five and seven years.
Cash-out refinance allows you to tap into the equity of your property, which will then allow you to free up money to invest in other areas. In other words, you borrow enough to pay off your mortgage on your property and then keep the difference. If you know what you need, it is one of the best real estate financing options available to you.
Compared to several tax benefits and other retirement options, self-directed IRA—a type of individual retirement account that can be used as an investment vehicle—gives investors more control. This is a good option if you want to amp up your retirement savings one property at a time.
