Real estate is a popular industry for consumers to start building their investment portfolio. While it may not be the flashiest and largest addition to your portfolio, it is a solid place to get your feet wet.
With multiple properties, you have the opportunity to establish a steady income stream through rental income. You can diversify your portfolio, allowing you to hedge against bumps in the stock market. If you pick the right property, then you stand to build your net worth as your properties increase in value.
Investing in real estate certainly has its advantages, but it may seem more like a pipe dream for most people. After all, it can be challenging for many to buy just one home. A second or third home may not be in the books. Needless to say, the cost of purchasing additional properties is a major barrier to entry.
After all, most of us don’t have tens (or hundreds) of thousands of dollars lying around to spare. Yet you can still finance your way into becoming a real estate tycoon, or at least the first steps towards this dream.
Aside from paying out of pocket, here are a few ideas for getting your first investment property.
Rely on a Home Equity Loan or Line of Credit
If your home is currently worth more than what you owe on it, then you currently have what is known as equity in your home. You can leverage this equity by taking out a loan or a line of credit in order to purchase an investment property.
If you have enough equity from the value of your home, that amount could be enough to purchase your first investment property outright. At the very least, you could cover the down payment on the property.
Either way, it could be a relatively straightforward way to utilize your current home’s value to buy into your second property. The goal should be to pay back your home equity loan while also getting your investment property in order. If you can find renters early on, the second property may be able to pay for itself as you pay back your loan.
To apply for a home equity loan or home equity line of credit, you simply contact the bank that holds your current mortgage or a different lender and request an application. The bank or lender will review your financial situation as well as the purpose of the loan or line of credit.
If it is approved, then you will get the loan and also begin making payments on the loan or line of credit.
The major drawback of this option is that your own home now has an additional loan or line of credit on it — and you have now lost the equity that you have built-in it. If your investment doesn’t pan out, you are putting your house at risk.
In addition, you may now be responsible for several debt obligations (mortgage + line of credit or loan on your home, plus a potential mortgage on your investment property). Before taking on this expense, make sure that you can afford this additional cost.
Take Out a Personal Loan
A personal loan can usually be used for any purpose from paying for a wedding to medical expenses. An investment property is not exempt from this.
You can apply for a personal line online or in-person with many different lenders. You often don’t need to provide collateral either, making them relatively accessible.
If you can get approved, then you should be able to cover the down payment on a second property. This may be a more viable option for someone who hasn’t built up any equity yet.
While they’re accessible, personal loans are characterized by higher interest rates compared to other loans like a mortgage or home equity loan. Only the most creditworthy applicants can qualify for the lowest rates below 10 percent.
As mentioned, it’s also more likely a personal loan can only be used to cover a down payment on a mortgage, so you may be out of luck if you wanted to cover a significant portion of the property expense.
Use a Conventional Mortgage
If you have access to some cash, then you can utilize a conventional mortgage to purchase an investment property. It’s a simpler approach. You make a down payment (typically 10 to 20 percent) and then pay off a mortgage for the remaining amount. Then you pay off the mortgage over 10 to 30 years at an affordable interest rate.
To get started, you’ll have to apply to a mortgage lender who will evaluate the property as well as your own credit history and finances. Based on this analysis, it will approve or deny the loan. If the mortgage is approved, you will be responsible for making monthly payments over the life of the mortgage.
The disadvantage of using a conventional mortgage is that you need to have some amount of cash as a down payment in order to qualify. If an investment property costs $100,000, for example, then you will likely need to put down $10,000 to $20,000 in order to qualify for a mortgage.
Take Out a Small Business Loan
A final option is to take out a small business loan if you have incorporated yourself or otherwise have formed a business entity for your investment properties. As a business entity, you can potentially qualify for a small business loan which can then be used to pay for your investment property.
To apply for a small business loan, you must submit a substantial amount of financial information about the business and yourself to a bank. After an extensive review, the bank will approve or deny the loan application.
The advantage of a small business loan is that it can be issued in a large amount and used for a number of purposes including purchasing investment properties.
However, small business loans can be expensive, and the approval process can be lengthy. Possibly the biggest drawback: banks typically only grant approval to established businesses, which can make it difficult for many newly-formed businesses to be approved.
If you want to get started in the investment property game, buying your first property can be a challenge. By taking some risks and getting creative, you can find a way to finance your investments and be on your way to financial independence.
About the Author: Andy Kearns is a Content Analyst for LendEDU and works to produce personal finance content to help educate consumers across the globe. When he’s not writing, you can find Andy cheering on the new and improved Lakers, or somewhere on a beach.