Are you a landlord looking for that next great property to expand your portfolio but don’t know how to finance it? Real estate investing is an exciting but often challenging endeavour, especially when it comes to securing the funds needed for acquisition.
Whether you're a seasoned property owner or a first-time landlord, this guide will help you navigate the intricate world of investment property financing. From traditional mortgage loans to creative financing options, we'll lay out the routes you can take to turn that investment goals into a tangible assets generating monthly income.
Here is a list of options to help you finance your next property, each with their own set of advantages and considerations:
The first option most investors consider is the conventional bank loan. Banks and mortgage lenders offer these loans, and they usually require a 20-25% down payment. The process of obtaining one involves credit checks, proof of income, and a review of your debt-to-income ratio.
The benefit of this option is you can often find lower interest rates, which means less money out of your pocket over the long haul. However, the process can be cumbersome and lengthy, sometimes taking up to 60 days to close. If you have a solid credit history and aren't in a rush, this is a reliable path to consider.
What if you’re presented with a fantastic investment opportunity but need the cash right away? You can opt for hard money loans! These are short-term loans provided by private investors rather than traditional financial institutions.
The key advantage to this financing options is speed. You can get a hard money loan in a matter of days, sometimes even hours. But there's a catch—the interest rates are often between 10-20%, and the terms are much shorter that other loans, averaging 12 months. This option is excellent if you're looking at a fixer-upper that you intend to sell or refinance quickly. However, due to the high interest rates, you don't want to hold onto it for long.
Private money loans are somewhat similar to hard money loans, but instead of getting funds from professional lenders, you're borrowing from someone you know—like a friend, family member, or business associate.
This could be an easier sell than convincing a bank to loan you money. Interest rates and repayment terms are generally negotiable, offering you flexibility. The significant advantage is that you might sidestep some of the red tape you'd encounter with a conventional loan. But be careful; mixing money and personal relationships can be risky. Make sure to draft a formal agreement to keep things transparent and protect both parties.
If you already own property, particularly your primary residence, and it has appreciated in value, tapping into your home equity could be a smart move. You have two primary options: a Home Equity Line of Credit (HELOC) or a Home Equity Loan.
A HELOC works a bit like a credit card; you can borrow up to a certain amount during the 'draw period' and pay interest only on what you borrow. Home Equity Loans, on the other hand, provide a lump-sum amount, and you start paying interest on the full sum immediately. Both options typically offer lower interest rates than hard or private money loans because they're secured by your home. However, defaulting could put your home at risk so you must balance your finances accordingly.
The criteria can differ substantially depending on the type of lender and the loan in question. For instance, private lenders might primarily value a pre-existing relationship with the borrower. Hard money lenders, on the other hand, could be more concerned with the health of the real estate market and a favourable estimated after-repair value (ARV). When it comes to home equity loans, HELOCs, and traditional loans, expect these lenders to enforce the most stringent requirements, particularly in areas like income and credit score.
It’s important to keep the following factors in mind while planning to finance your next property investment:
One of the cornerstones of financing a real estate investment property is the downpayment, and the larger it is, the better. Unlike the downpayments for primary residences, which can sometimes be as low as 3-5%, investment properties often require heftier upfront payments—typically between 20-30%. Submitting a larger downpayment matters for several reasons:
The term "strong borrower" doesn't just refer to having a decent income; it encompasses a range of financial indicators that make you an attractive candidate for lenders. This provides you with the following benefits:
Whether you're leaning toward a conventional bank loan or considering more creative avenues, the key is to understand your options and assess what works best for you. Once you've got that property, you need to consider its management. That's where Advantage Realty Services can step in. We take the hassle out of property management so you can focus on growing your real estate empire. Contact us today to learn about our services!
