There are many simple and also creative ways to finance your first rental property. If you are brand new to the real estate investment world you may not realize how many ways there are to get financing, especially if you have great credit and a good reliable income source.
Of course you don’t want to over leverage yourself but you do want to take advantage of what is available to you. By not taking advantage of real estate investment opportunities you are leaving money on the table.
1) The best way to get financing for your first rental property is to live in the property yourself for the first 12-36 months depending on the laws in your area or rules of the lender. By making your rental property your primary residence first, you will get the best financing possible for your mortgage. This is what I did with my first rental property. In this case you can get a simple 30 year mortgage at a great rate. You can even put a lot less down for your down payment. I’m talking in the single digits! Of course this works better if you are young, single and can easily move around. But not everyone can do that and I could not do that now since I am married and have two children. So thankfully there are other options.
2) A 5 year ARM mortgage. I know, I feel like the ARM mortgages are what many folks got burned on with the housing bubble blow-up. But the dust has settled and banks are much better at loaning their money to people that can actually afford it. So if you can stomach it, a 5 year ARM mortgage may be the way to start.
3) Private Investors. Investors are out there and they are willing to back you. Especially now that the real estate market is looking better than ever. Do your homework though. Make sure they have experience in loaning out money. Make sure they have a college degree, no criminal records, proof that they know what they are doing. Make sure you know what you are getting into. And it doesn’t hurt to have a lawyer read over your contract.
4) Seller Financing. It can happen. So this is kind of like Private Investors but the person selling the rental property is going to finance you. This can easily happen especially if you are buying a rental property from a landlord. The landlord may just want to cash out and retire. What better way for the landlord\seller to retire than to get payments of principal and interest from you each and every month. Just like Private Investors, make sure you check the credentials of the seller too. You want to make sure you are dealing with someone who is solid.
5) Good old CASH. If you have it you win. It’s just a pure investment at that point. Most of us don’t have tons of cash just lying around which is why I squished this option in the middle.
6) Hard Money Lenders. This route is a little more complex but very helpful if you find a steal of a property and need the financing fast. Borrowing money from a hard money lender gives you a few months to a year to get a tenant and start proving that the property could become cash flow positive. If you are able to make it work then you would want to go the conventional mortgage route when your hard money loan term is up. If you are able to get a year out of your hard money loan and you have a tenant signed up for a long term rental contract you are in good shape. The banks will be more willing to give you the conventional mortgage since you have proven the property can be cash flow positive.
7) Home Equity Loan. This is a loan you would take on a property that you already own. Usually a bank will loan you a percentage of the equity you have built up in the property you already own. These loans have rates that are higher than a mortgage but not as high as a hard money lender would charge. You also have loan lengths that are long such as 10 or 20 years. This is a great option if you have a property that is showing great cash flow possibilities and you have a good amount of equity in a property you already own.
So there are 7 options I was able to quickly lay out for you to purchase your first rental property. So what are you waiting for? Go out and get it done!