How to Finance a Real Estate Investment

It may seem like a distant memory, but the effects of the housing market crash are still felt. While things are looking good for housing prices now, you shouldn’t make major real estate purchases without doing some serious homework first. You never really know what will happen, so when financing a real estate investment, you need to check all of the boxes and keep yourself informed.

One of the biggest misconceptions regarding the real estate industry is that you need to have tons of money upfront, which just is not true (thankfully). There are countless of options out there designed to help you finance your new investment. While there is definitely no such thing as quick and easy financing when it comes to real estate, there are a few things you can do to make things go a little bit smoother.

Finding Rental Property

Being to find a good real estate deal can mean you don’t have to borrow as much. Maybe you can even do an all-cash deal (hey, just throwing it out there).

Remember this mantra, find a house in the best neighborhood possible. Even the worst house in a good neighbor can be less stressful (tenant-wise and money-wise) than the best house in a bad neighborhood.

Roofstock can help you find high-value rental property. In fact, 75% of its users are first-time landlords. You may even be able to buy a fractional share if you’re not ready for the full-time landlording yet.

How to Finance a Real Estate Investment

Know Where You Stand

Before you even start thinking about making a deal on a loan, you should check your credit score to see where you stand. While there are other factors that can determine loan terms on your property, a low credit score might cost you extra for the same interest rate. For instance, if you want to keep that low interest rate, you might have to pay a fee. Or you can just sign off on a higher interest rate and avoid the fee altogether. Weigh the outcomes of both choices before you decide—one could be significantly lower.

Don’t Skimp on the Down Payment

Mortgage insurance is not going to cover an investment property, so you’ll need to put a sizable percentage down—typically 20 percent at the very least. The more you put down, the better, as you might be able to score a way better interest rate if you put down more than 25 percent. Unless you are a master at saving money and have enough to make the down payment on your own, you will have to look into some financing options.

Avoid the Big Banks and Seek a Hard Money Lender

If you are not able to pull together a big enough down payment on your own, you might want to avoid going to a large bank for assistance. Traditional banks are usually pretty strict with their financing options, while modern, less conventional lenders are more willing to approve and fund.

Hard money lenders offer more flexibility, as they don’t adhere to bank standards regarding credit—they may also know the local market better. Approval for this type of loan typically depends on the value of the property that you are seeking to purchase. The lender will assess the future value of the home and figures out the loan size based on that value. Hard money lenders can be invaluable in competitive real estate markets.

Looking to purchase property in the Central Valley? Search for Fresno hard money lenders. Want to invest in SoCal? Browse Los Angeles private lending companies. Keep your eye out for companies that offer quick approval and funding, don’t have any prepayment penalties or income requirements, and don’t require a minimum FICO score. Another major perk of hard money loans? Immediate financing allows you to strike quickly—traditional mortgages might take up to two months to close.

How to Finance a Real Estate Investment

Seek Funding From Those You Know

You can also ask family and friends when it comes to financing a new real estate investment. While you have to make sure to make things as professional as possible—which means paperwork and the whole nine yards—there’s a lot to be gained from financing a deal through those you personally know. First of all, you won’t need any start-up capital for a private money lender. If you pool together a big enough group of people, you can close the deal, clean the place up and refinance it. If done right, you can pay each of your investors back (with the agreed-upon interest, of course) and still make some money for yourself when it is all said and done.

Hey, it worked for Warren Buffett—it could easily work for you.

What About HELOCs?

Another quick option can be a HELOC (Home Equity Line of Credit). Sadly, you can’t deduct the interest payments when you use the cash for a second residence or rental property.  This can be a good option if you want to flip houses.

If you use a HELOC for rental properties, most banks require you to wait at least 6 months after closing to apply for a mortgage. This gives them a good idea what your monthly rental income will be.

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