November 6, 2017

Owning a rental property can be a great investment, but before you start house shopping, you need to consider the financial side of things. All the different options can seem overwhelming, and it’s always good to keep in mind that one person’s ideal solution might not fit you. These are some of the more popular financing avenues that can help you begin your journey towards becoming a real estate tycoon:

Go the traditional mortgage route

To go down this route, most lenders will ask for a 20% down payment to secure traditional financing. This is because investment properties aren’t covered by mortgage insurance. A 25% down payment may even qualify you for a better interest rate, which pays off in the long run if you have the money. As with many loans, you’ll need to have a good credit score and undergo the bank’s qualifying process. There are also some additional fees for a mortgage – around 2% to 5% of the purchase price on average.

Take it slow as an owner-occupant

This is one of the best financing routes, especially for someone starting out. Look for the perfect rental property, then use it as a personal residence for the 12 months that an owner-occupant loan requires.

For example, loans issued by the Federal Housing Administration (FHA loans) are very popular as they can go as low as 3.5% for a down payment. This rate then stays the same when you move out and turn it into a rental. Other benefits of this include being able to take your time fixing up the property and learning the specifics of it.

Look for an investment partner

The down payment on a traditional mortgage means you’ll need to have quite a bit of saving upfront. An option is to find someone to partner with who can make up what you lack with the down payment. This will, of course, end up meaning a split in the profits, so you’ll have to weigh the pros and cons and see where your priorities are. In the end, it can lead to you gaining your first investment property even sooner.

Consider a home equity loan

A home equity loan is a second mortgage which allows a homeowner to borrow money using their home’s equity as collateral. To break it down, the equity is the difference between what you owe on the mortgage of your home, and how much the home is worth.

Using this kind of loan can let you tap into up to 80% of your existing home’s value, and use that to finance your investment property. The repayment period, like a normal mortgage, is usually around 20 to 30 years.

Tips to help the financing process

Look into buying an investment property with a tenant already in place – there are some serious advantages to this! Since the tenant would still be paying the same rent, you will most likely end up with a month’s rent before the first mortgage payment is even due. Plus, you probably won’t have to worry about fixing up or renovating the place until after that renter leaves.

Of course, you’ll have to look into if the tenant is paying market rent. If the rent the tenant is paying is quite a way under market, you may be able to get a discount off the property’s sale price.

Before beginning to look for finance options, it’s important to pay down any existing personal or business debt you might have. This gives you the best chance possible for a good rate if you’re going to a lender.

How do you get started?

The best option is to gather as many options as possible and compare them. Meet with several lenders who can show you what mortgage programs they offer and check in with a bank or two. You can also try mortgage brokers or even an online lender. It’s likely that they will each have different programs, so it’s good to shop around to find the best one for your situation.

About the Author: Jennifer McDermott is the Consumer Advocate at personal finance comparison website finder.com. She has more than 12 years’ experience under her belt, where she’s analyzed consumer trends in the finance, lifestyle and travel industries. Jennifer loves to uncover interesting insights and issues to help people make better decisions with their money.

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