Owning an investment property comes with many benefits, including passive income from rent. However, investing in real estate can have a high start-up cost.
With rising home prices and mortgage rates, buying an investment property can seem impossible, but it doesn’t have to be this way! If you’ve decided buying a property is right for you and you’ve found a good deal, there are many ways to go about financing it.
To help you out, the experts at Evolve Nevada have come up with this guide on investment property financing. Keep reading to learn about the options available to you, as well as some tips to make the process easier.
9 Ways to Finance an Investment Property
Below are nine options to get the money you need to start investing in real estate.
Conventional Bank Loans
Conventional financing is always a good option. With a conventional loan, you’ll be expected to make a down payment of 20% to 30% of the property’s purchase price.
The drawback of conventional loans is that your personal credit score and history determine whether you get approved and what kind of interest rate applies to the mortgage.
You must also prove you can afford to make the monthly loan payments. In fact, most lenders expect borrowers to have at least six months of income saved to cover mortgage obligations.
Local Bank or Broker
Sometimes, applying for a loan at a local bank or broker is better than going to a large national bank. These small-scale institutions tend to be more flexible when it comes to lending money. Plus, brokers may have a wider range of loan products, which can adapt to your needs.
Private Money Loans
If banks or mortgage brokers aren’t an option for you, you should consider taking out a loan from a private lender.
This could be a friend or family member, but another great way to find private investors is to attend local real estate networking events or look into peer-to-peer lending platforms online.
However, the terms and interest rates of private money loans can vary significantly, and they’re typically secured by a legal contract that allows the lender to foreclose on the property if the borrower defaults on payments.
Owner financing is a great alternative to traditional mortgage loans. This option allows the homeowner or seller to finance the purchase. However, it’s often at an interest rate higher than current mortgage rates and with a balloon payment due after a certain number of years.
If you have a significant amount of equity in your residence or other investment property, you can use it as a form of financing. Whether it’s through a home equity loan, home equity line of credit (HELOC), or cash-out-refinance, you can borrow up to 80% of the property’s equity value.
These options have pros and cons. Home equity loans come with secured, low interest rates but require a good credit score.
With a HELOC, you can borrow against the equity like you would with a credit card, but the rates are variable and could increase at any time. Cash-out refinance comes with a fixed rate, but may extend the life of your mortgage.
These short-term loans are ideal for house flippers. They come with interest rates ranging between 12% to 18%, plus two to five points. If you’re looking to buy, fix up, and then sell a property, this may be exactly what you need.
Credit Cards and Personal Loans
You can use credit cards and personal loans to finance part of your investment purchase, but you should keep in mind that you won’t be able to borrow as much as you would with a traditional bank loan. Plus, both personal loans and credit cards tend to have high interest rates.
These shouldn’t be your first option but can be useful if you need extra financing.
A margin loan is a line of credit that allows you to borrow against the value of investments you already own. They’re mostly used as short-term funding tools. They come with many risks, such as a margin call and amplified losses if your real estate portfolio declines in value.
Life Insurance Policies
Most life insurance policies are considered a type of liquid asset you can cash out.
Homebuyers with permanent or whole life insurance, for instance, can borrow against their policy and secure the amount needed for a down payment, closing costs, or any other up-front fee a home purchase might come with.
Tips for Financing an Investment Property
While there are many options available, financing an investment property can be complicated. The following real estate investing tips can help improve your chances of success.
Make a sizable down payment. Putting down a larger down payment can help you qualify for better mortgage interest rates.
Improve your credit score. Credit score and history can greatly influence your chances of getting a loan. A higher credit score can help you get lower interest rates.
Plan beforehand. Researching beforehand can save you money in the long run. Before applying for a loan, consider all your options to choose the best one for you. It’s also important to consider all possible expenses you may encounter so you can start saving money.
Hire a professional. Working with a professional property manager can save you plenty of headaches. With their knowledge of the real estate market, they can help you find the right property, as well as guide you through the financing process.
Buying an investment property might seem risky, but there are many financing options to help you grow your real estate portfolio, such as mortgage loans, owner financing, and home equity loans.
If you’re looking for an investment property in Nevada, contact Evolve Nevada today! Our team of real estate experts has the knowledge and tools to help you build your investment portfolio and grow your wealth.