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How to Finance an Investment Property

How to Finance an Investment Property

Picture this: You stand before a charming real estate property, its potential radiating from every corner. The thought of owning a piece of real estate that can generate passive revenue and build wealth seems perfect. But here's the question: How can real estate investors finance this promising venture?

Understanding the basics of funding property is the cornerstone of a successful real estate journey. In this guide, we will explore various financing methods and uncover strategies to turn your dreams into reality.

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Go for the Sizeable Down Payment

Have you ever heard about the more, the better? It applies to the down payment too. A larger down payment can bring substantial benefits when funding an investment property. Generally speaking, the more cash you commit upfront, the better terms and rates you can secure from the lender.

You cannot completely rely on an insurance mortgage for an investment property and must put in at least a 20 percent down payment. A 25% down payment can help you negotiate better terms and interest rates if you can afford more.

In addition to securing a more attractive conventional mortgage rate or real estate investment property loans, it also shows real estate investors that you are serious and committed to the venture. There are many factors when real estate investing, but it can be worth it.

Build Strong Financial Stability

Before you begin your search for financing and loans, start by building a strong foundation of financial stability. This includes having good credit and healthy reserves. 

A good financial score indicates that most lenders view you as financially responsible and capable of managing your finances well; a score of 740 or above is generally considered ideal. Below 740, additional costs can be incurred for the same interest rate. Fees ranging from one-quarter to two points may apply to maintain the same rate.

pie and bar charts

Adequate reserves are also essential for funding an investment property. This means having enough cash to cover up to six months of expenses. As it shows that you can bear the mortgage even during vacancy or financial hardship

Explore Neighborhood Banks and Brokers

Don't be afraid to explore local banks and brokers, as neighborhood banks and private money loans offer more reasonable terms than the big institutions. Neighborhood banks often have more lenient lending standards and can provide better rates and terms for investment properties.

Moreover, brokers have access to multiple lenders and can provide tailored solutions for investment property funding. However, it is important to conduct thorough and compare terms before deciding.

Unlock Opportunities with Owner Financing

Gone are the days when rental property owners depended exclusively on conventional bank loans and lenders to finance a real estate investment. Now, there is the option of owner financing, which can be a great way to purchase a property without going through the usual hassle associated with traditional loans.

person putting coins in a piggy bank

Owner financing involves a seller providing the buyer with a loan, often at an attractive rate. You must approach the seller with a clear proposal outlining the amount of money and terms you desire for the owner funding arrangement. Your role is to convince the seller that owner funding is the right choice and that you are the ideal buyer.

Look Into Home Equity

Consider unlocking the value of your home equity to finance an investment property. Home equity loans, HELOC, and cash-out refinancing are ideal if you have built up enough equity in your primary residence and would like to use it as collateral for a loan.

Home Equity Loan

A home equity loan allows you to borrow money against your house's equity. This type of loan offers a relatively low interest loan rate and flexible loan repayment terms, making it an attractive loan alternative to traditional financing. 

Home Equity Line of Credit (HELOC)

HELOCs give you access to your home equity through a line of credit. This works similarly to a credit card, as you can withdraw funds when needed instead of receiving a lump sum. 

HELOCs often feature a lower loan interest rate compared to home equity loans. However, it's important to note that HELOC interest rates are typically variable, which means they may increase in the future.

Cash-Out Refinance

You replace your existing mortgage loans with a larger one in a cash-out refinance. Differences between new and old mortgages are provided in cash, which can be used to fund investment properties or other projects. 

exchanging bills

Refinancing your mortgage can lower your interest rates or shorten the repayment term. 

Opt for Peer-to-Peer Lending

Peer-to-peer lending platforms match real estate investors with borrowers who need financing for various purposes, such as purchasing an investment property. Fees and interest rates are generally low, making it a more affordable option than traditional lenders and can help your ROI.

With peer-to-peer lending, you don't have to worry about the hassle of paperwork and can access funds quickly. Additionally, these platforms often provide more reasonable terms than big financial institutions.

Use Hard Money Loans

Many hard loans, also known as fix and flip loans, are more suitable for flipping rental properties than buying, renting, and holding them. While it's possible to use a hard money loan initially and then switch to a conventional loan or other funding options, starting with those alternatives is more convenient and cost-effective if you do not intend to flip the rental property. 

However, the major drawback of fix-and-flip hard money loans is their cost. Interest rates can be anywhere between 12 to 18 percent, depending on the lender, and the repayment period is typically short, often less than a year.

Try Credit Cards and Personal Loans

Last but not least, funding an investment property with a card or personal loan is possible. Both options have higher interest rates than other financing methods and should only be considered if you are sure that you can pay off the debt quickly. 

person using credit card

Furthermore, when using a credit card, be aware that most cards have high limits, and overspending is easy. On the other hand, personal loans allow to borrow up to about $100,000. Additionally, if you opt for a personal loan, ensure you understand any potential fees or conditions associated with your loans before signing anything.

Bottom Line

Funding your investment property requires careful consideration and exploring various options. From maximizing your down payment to leveraging home equity, numerous avenues exist to fund your real estate venture. Remember to build a strong financial foundation and choose a financing method that aligns with your goals and circumstances. 

To secure your investment property, consider connecting with Income Realty Corporation. As experts in the field, they can provide tailored guidance and solutions to meet your specific funding needs.