Property investment is a great way to build net worth, but first-time investors often feel intimidated by the perceived difficulty of starting, building, and managing a property investment portfolio. Part of this reason is related to the initial high cost. Once you’ve decided to become a property or real estate, you’ll need to consider how you’re going to finance your investment property.
Before you consider investing in real estate, know what you want to do with your property investment and how to find financing. There are several forms of investment property financing, and each method comes with specific criteria that you need to meet to qualify.
Before you settle on particular financing, conduct research and understand the requirements and the alternatives. If you have a challenge understanding any methods, talk to a qualified real estate advisor like Pherrus Property Investing for a better understanding.
Property Investing Financing
There are four main ways of property financing that first-timers can utilize to finance their real estate investment:
Mortgage or Conventional Bank Loans
With conventional financing for residential homes, you may be required to have a down payment of 20% of the home’s price. The lender may require a 30% down payment in an investment property. To qualify, you’ll also need to have a good credit (FICO) score and documentation regarding your debts, financial obligations, and income. While it’s expensive, this is a method first-timers can explore.
Hard Money Loan
Typically, a hard money loan is a short-term loan from a professional lender backed by the property’s value, and not the borrower’s creditworthiness. These are last-resort loans because they tend to have lower loan-to-value ratios with higher interest rates. Due to their nature, they’re mostly used in the short-term by investors for reasons like rehabilitating an investment property.
As a result, they’re more suited to flipping an investment property than buying and holding, renting out, or developing it. First-time investors can try out these loans if they have a property to tie them to, but it’s important to seek the advice of professional property consultants.
Private Money Loan
If you can’t get a hard money loan, you can opt for a private money loan. These are typically loans from one individual to another who know one another rather than from professional lenders. Private money loans are informal financing. Sometimes they can be from individuals with a vested interest in the investor (such as partners or parents). If there is no hidden agenda, this is the best loan facility for a first-time investor.
You can tap on your home equity to get a home equity loan, cash-out refinance, or a home equity line of credit (HELOC) to help you secure an investment property. Often, you can borrow up to 80% of your home’s equity value and use the money to purchase, repair, or rehabilitate an investment property. Before you decide to use your home for equity financing, you need to make sure you have the means and ways to pay it because it could result in the loss of your home.
Each type of financing has varying requirements. Hard money lenders may require a property in a high market end with great after reaper value. Private lenders may just require a good relationship between you and the lender. Whatever financing option you choose, you’ve made a great decision to join the few investment property investors.