One of the key decisions that investors make when purchasing an investment property is how they’ll finance the purchase. While some investors opt to use cash, others look to finance or find the best mortgage for landlords and take advantage of leverage to maximize returns.
The good news is that if you’re using financing, there are lots of different options to consider, and savvy investors are strategic about the type of financing they use and the terms they get. This is something that’s particularly important for buy-and-hold investors, who need a financing strategy that will work in the long term.
The reality is that there are more financing options than many investors realize, and many are more accessible than investors realize. Here are 5 different ways that real estate investors can finance their next purchase to help meet their short and long-term investing goals.
Conventional Loan
The conventional loan is the type of financing that most people think of first when contemplating using leverage. Convention, or traditional, loans are loans provided by banks, credit unions, and savings and loans. Borrowers are usually required to make a down payment of 20% of the purchase price, but sometimes for investment properties, this is as high as 30%.
For this type of loan, borrowers also need solid credit and often need to show cash to cover six months of payments and fees. These loans can be slower and the process is a little more rigorous than some other types of tools, so it’s not ideal for buyers that are trying to close quickly. That said, for borrowers with strong credit and adequate cash, these can be good long-term financing options.
Private Loans
For investors that are looking for a tool that is more flexible and easy to utilize, private loans can be a good option. If you have family, friends, or business partners with cash just sitting in a savings account, you can offer them an interest rate that will be favorable to both of you.
If you don’t have a network of people that can offer this type of loan, there are still ways that you can take advantage of this tool. There are investors and companies, like LendingOne, that offer private loans to borrowers. These can be a great way to quickly get the financing you need using an efficient and common-sense approach to lending.
This is especially true when you work with established companies like LendingOne that have a track record of success and thousands of satisfied and returning customers. These types of private loans often offer attractive terms and rates and can help borrowers get the cash they need when they need it. As a result, private loans are often the best mortgage for Landlords.
Hard-Money Loan
A hard-money loan is a type of loan that’s secured by the property you buy. It’s most well-suited for flipping or short-term loans. Because these types of loans generally have higher interest rates, they’re usually less ideal for buy-and-hold investors.
Nevertheless, hard-money loans can be a good option for investors with bad credit or that need short-term financing.
FHA Loans
FHA loans are loans that are backed by the Federal Housing Administration. While they’re only offered for owner-occupied properties, they can work well for investors looking at multi-unit buildings. For properties with up to four units, a borrower can qualify for an FHA loan as long as they live in one of the units.
Because of the favorable terms of FHA loans, this is an option worth considering. FHA loans require a smaller down payment and lower interest rates than conventional loans. As a result, they can be a great tool for borrowers, especially new investors or investors with less cash available.
Home Equity Loan
Another financing tool that’s worth considering is a home equity loan. Investors can draw on their home equity to make their next real estate purchase. There are a few ways to do this, including a home equity loan, home equity line of credit, or even a cash-out refinance.
The terms vary based on the type of loan you use but keep in mind that you can usually borrow against up to 80% of your home’s value. If you’ve got a lot of equity in your home, this can be a great way to finance an investment property purchase.
We Can Help You Get the Most Out of Your Home
Once you’ve figured out how you want to finance your next purchase, we can help you get the most out of your investment. We offer complete Tenant Screening services and make it easy to create a state-specific Lease Agreement. Visit ezLandlordForms.com to let us help you reduce the risks of bad rental outcomes and get the most out of your real estate investments.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.
