There are many options available to you to finance your rental properties. At the beginning of my real estate investing career, I took out ten traditional mortgages. Beyond the traditional mortgage lenders, there are hard money lenders, private money lenders, owner financing and rent-to-own agreements. It is important to fully understand all the options available to you and what works best for your financial situation and goals.
If you are working at your current job and your current income qualities for traditional financing, then you can borrow your mortgage at a low-interest rate through a traditional lender. Your property must also qualify for the loan, passing the bank’s appraisal. A difficult task for a fixer-upper property.
If you secure a traditional loan, opt for the longest-term mortgage you can secure. This will ensure a larger monthly cash flow it will help you build wealth over time. Inflation will always increase an average of 2-5% per year. This means your rental income will increase, but your mortgage payment will stay the same, putting more money in your pocket each month.
Many investors do not qualify through traditional lenders because of their credit history, income, and the property conditions. If you or your property don’t meet the requirements of a traditional mortgage lender, one option is a hard money loan. An asset such as real estate is required as collateral for a hard money loan. There are far fewer criteria to qualify, but the interest rate will be much higher as will closing costs. A hard money lender will only lend when there is enough equity left in the property. For example, if the property fair market value (FMV) at 100K, they will lend 75K max. Its Loan to Value (LTV) maxes at 75%.
For borrowers not qualified for a traditional loan, a private money lender is another viable option. Private money lenders are high paid professionals like doctors, lawyers who have money but do not know where to invest. They are looking for a better alternative to the traditional saving account or their stock/bond investment accounts. Ultimately, they want a better return on their money. The interest can be from 8-10%, and their fee can be lower compare to hard money lenders. If you can find private financing is a better unconventional option. The pros and cons of becoming a hard money lender.
You can buy a rental property and have the seller to carry the mortgage for you with agreed down payment on the contract. Some sellers are desperate to get rid of the project and will welcome this unconventional option. Owner financing is a good option for a new investor who has very little funds for the down payment but is ready to get started in the business. The title of the property will be in the investor’s name, and they will still receive all the tax advantages of owning an investment property. The owner finance interest rate is lower compared to a hard money lender, ranging from 7-10%.
Similar to owner financing, this requires an agreement with the seller. In a rent, to own arrangement, the investor rents the property from the owner. The investor puts down a deposit that can be up to 5% of the agreed purchase price with the seller. The property remains in the seller’s name while the investor pays a higher than market monthly rental payment. A portion of their rental payment goes towards the future down payment. The investor has the option to buy base on a term they agree with the seller. Some can be one or two years to get a traditional mortgage loan to pay off the seller.
All of these money lending strategies have the potential to pave the way to a successful career in real estate investing. It is important to establish a plan and learn as much as you can about the industry before jumping into any financial agreement. My goal through future blog posts is to guide you deeper into all these financing options
Please leave your comment below of what funding strategy do you use the most.