While cash is king when it comes to buying rental properties, most of us don’t have an extra $100,000 or so to buy an investment property outright. As such, lenders play a vital role in expanding one’s real estate portfolio.
That said, the financing process isn’t as easy or straight-forward as you’d think. Since many rental properties need major repairs, they don’t qualify for some types of financing since the necessary renovations make it impossible for tenants to move in right away.
But don’t worry because there are many ways to get the funding you need to buy a rental property. Keep reading below.
Good Ole Conventional Financing
With conventional financing, you’ll need to make a down payment (usually at least 20 percent of the purchase price) and then pay a 15-30-year mortgage note each month. The biggest problem with conventional financing is that you can’t use gift funds or count rental income in your debt-to-income ratio. This means that you must be able to afford your primary residence and your investment property without counting the potential rental income in the mix.
Home Equity Loan or HELOC
You can draw funds from the equity in your primary residence to get the cash you need to pay for your rental property. Similar to a conventional mortgage, a home equity loan spans 15-20 years with you paying back the loan in monthly payments of principal and interest.
A HELOC, or home equity line of credit, works like a credit card. The lender extends a line of credit based on the equity value in your home, and you use it when you need it, making monthly payments as you go.
You can refinance your primary residence to get up to 80 percent of its value. This is like taking out a conventional mortgage, so you’ll need to wait the 30+ days for the process to complete. The outstanding value of your home will be paid off and a new mortgage will be created, with you getting the difference back in cash.
There are individuals and companies who lend money for real estate investing in exchange for a secured interest in the property. While you’ll likely pay a higher interest rate, and it’s very similar to the conventional mortgage process, private funding may be the help you need until conventional financing is possible.
Regardless of the method you use to obtain financing for your rental property, you’ll want to refinance down the road and get into a conventional 15-30-year mortgage so you have a set monthly mortgage payment you can plan for in the rental payment you set for your tenants.