Last Updated on: 31st January 2023, 06:42 am
So you find the perfect property to finance huh? Or did you?
We’ll, getting financing for a rental property isn’t easy at all, or maybe it is but for the most part, it isn’t.
In this post, we’re gonna dice in and discuss about some of the ways you can do to finance a property so that you can make a rental.
How to get funding to buy rental property?
Unless you got on hand capital to use for the property purchase, your option is and will always be to take a loan.
Let’s get rigt into the first option, which is:
1. Conventional Loans
For aspiring property investor, conventional loan terms such as 15-year fixed rate mortgage and 30-year fixed rate mortgage are going to be your best option and are likely the way you’re gonna finance your first rental property.
Please understand that an investor loan (for rental property) is different than a owner occupied loan (loan for first time homebuyers or primary residence). This is because a lender will require at least 20 to 25 percent down for investor loans, and for owner occupied loans the downpayment could go for as low as 3.5%.
Should you go for 15-year or 30-year fixed rate conventional mortgage loans?
If you’re a first time homebuyer, it’s unlikely that you’d go for 15-year or 30-year fixed rate conventional mortgage loans because these loans are intended for property investors, thus, they have a higher downpayment. Instead, go for FHA loan or if you’re part of the military, go for VA loan.
Why are owner occupied loans have low downpayment?
Owner-occupied loans have low downpayment because it is for the purchase of properties that you would actually be living in, thus, it is considered less risky by lenders. When a borrower occupies a property as their primary residence, they have a vested interest in maintaining and protecting the property, which can reduce the risk of default (failing to pay the mortgage).
Owner-occupied loans are also backed by the government, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA), which is where we got the term “FHA Laon” and “VA Loan”.
Why are investor loans have a high downpayment?
Investor loans, such as 15-year or 30-year fixed rate conventional mortgage loans, which are intended for the purchase of investment properties, have high downpayment because they are considered to be risky for the following two main reasons:
- Investor’s income and assets are not directly tied to the property.
- There are risks of vacancy (people moving out) resulting in negative income or decreased rental income.
2. Home Equity Line of Credit
HELOC is a type of loan that provides a line of credit that can be used to make draws just like you would on a credit card. This is done by leveraging or using the available equity you have in your home.
Isn’t HELOC just the same as Cash Out Refinance?
Not quite. Cash Out Refinance allows you to cash out a lump sum of money at once, but with HELOC, it works as a line of credit where a borrower can make draws, repay it and then make draws again, a lot like something we do when we use an actual credit card.
Who would qualify for a Home Equity Line of Credit (HELOC)
Anybody who owns a home that they personally live in and has enough equity required to use as collateral can be qualified for HELOC (Home Equity Line of Credit)
How much credit can you get when approved for HELOC?
You can get as much as 75% to 80% out of your total home equity to be used as your line of credit.
Let’s say your total home equity is $300,000, if you got approved for 80% of that, you’d have $240,000 to use as a line of credit.
How much interest will you be charged with HELOC?
The interest HELOC’s charge will only be based on how much of the available credit was used, not on the entire available credit you have been approved for.
How and What can you use your HELOC for?
HELOC or Home Equity Line of Credit can be used in many different ways, including:
- To pay off personal debt
- For house renovation
- Rental property purchase downpayment
- Tuition Fees
- Hospital Bills
- Business Capital
- Other emergency expenses
3. Seller Financing
Seller Financing is when the seller of the home is the one that is providing the finances for the buyer to buy the property. This is done by the buyer straightly working out the terms of the loan with the seller of the house directly as opposed to the traditional way of mortgage loan where a homebuyer would need the help of the bank.
Why do homebuyers choose seller financing over banks?
Here are the 5 main reasons why homebuyers would rather choose seller financing than traditional lenders:
- It makes home purchase easier for them: Unlike banks, the seller of the house in seller financing doesn’t require strict credit and income requirements, making it easier for buyers to qualify.
- Faster Transaction: Transaction, or rather, the approval process to possibly get a loan and own property through seller financing is a lot faster than going through how traditional lenders do it.
- Lower downpayment: Downpayment on seller financing can be a lot lower depending on how well the negotiation went.
- Lower Fees: These fees include the origination fee and closing cost
- Low risk of foreclosure: If the property lives in has been acquired through seller financing and were to ever face foreclosure, it might be easier for you to make an arrangement with the seller itself to possibly save your home. But with banks, who are strictly bound by the strict rules of the banking system, it will be hard.
Seller Financing: Who is it for?
Seller financing may be a good option for the following groups of people:
- Homebuyers who are unable to qualify for a traditional mortgage
- Homebuyers with low income
- Homebuyers who don’t have large money saved up for down payment
- Homebuyers who want faster transaction
- Homebuyers who want to save up on additional cost and high interest
- Real estate investor.
4. Hard Money Loans
Hard money loans are designed for the short turnaround and that’s because the interest rates are so high
This type of loans are more designed for investors who’s looking to fix and flip a property and wanted to get money fast and avoid the hussle of going through whole process with the traditional mortgage lender.
Here are the 13 thing you should do before you go to hard money lenders?
- Have a buisness plan
- Have a good deal
- Determine how much you need to borrow
- Gather your financial records and personal identification
- Put together a plan of how much the renovation will cost
- Determine the type of renovation needed
- Determine the timeframe of the loan
- Determine what you think it would property would sell for
- Determine how much the profit of the deal
- Gather the requirements needed
- Determine what asset(s) you’d use as a collateral
- Know your credit score and history
- Plan the details and purpose of the loan
What type of individuals do hard money lenders can work with with?
Hard money lenders typically can work with individuals and businesses who:
- Borrowers who are in need of an immediate large funds (either business or individual)
- Borrowers who don’t have a favorable credit score but have assets to use as a collateral
- Borrowers who can’t obtain a traditional mortgage financing but can use other assets as a collateral
- Borrowers who are willing to make a short term loans
Why choose Hard money landers over banks?
- Higher chance of loans being approved
- Less strict credit score qualification
- Collateral based focoused rather than credit and financial history
- Short term loan options
- Less restriction on the maximum funds you can be approved for
- Business friendly
What are the downside of Hard Money Lender?
- Higher intrest rates
- Payment terms are shorter than traditional bank loans
- Laon terms and conditions are more strict
- Limited flexibility on interest and repayment terms renegotiation
- Higher risk of foreclosure.
Note: Working with hard money lender is a good, so long as you are consistent with following through the payment terms that has been aggreed on and not making any lapses on them.
Hard Money Loans: Involved Parties, Fees and Required Professional Services
Details for this subject will be for another post, read here – Hard Money Loans: Involved Parties, Fees & Required Services
Seller Financing: Involved Parties, Fees and Required Professional Services
Details for this subject will be for another post, read here – Seller Financing: Involved Parties, Fees & Required Services