Real Estate has always been one of the most popular investment choices for people who love to boost their wealth. This is quite obvious considering how many benefits it provides. It can help you create a steady stream of passive income while also providing you with a hedge against the volatile market. While this may sound appealing, financing for investment property requires a bit of money.
Not everyone can afford to invest in real estate properties. Well, at least that is the belief among many up-and-coming investors. Sure, it helps to start with a bulk amount when you begin real estate investing. However, that’s not always the case.
In this article, we’ll guide you through the process of financing an investment property with some easy methods. So, let’s get started, shall we?
Related Article: Investment Strategy for Beginners: How to Start with Just $100
1. Real estate partnerships
A real estate partnership amalgamates the strengths of a group of investors into one investment property. The partnership accord requires each investor to be involved in the partnership as equal or limited members.
A real estate limited partnership (RELP) is a pass-through entity, and hence all the contributions made under it are not taxed. Investors can pool their contributing capital and start working on projects that are too big to be handled by individual members.
By using this method, a borrower can fast forward the process of financing with ease. Also, when you create a limited partnership firm, your liability is limited to the contributing capital.
While financing for investment property is the primary cause of partnerships, one can also establish partnerships for other reasons like access to a partner’s contacts in the local planning and zoning departments.
Benefits of Forming a Real Estate partnership:
- Easy to form and simple to maintain
- Does not involve income tax
- Shared responsibilities
- It can help condense the financing process of your investment property
2. Hard money loans
Hard money loans ate short-term aqueduct loans and are commonly used in real estate investment channels. Unlike other loans on this list, they are not provided by banks or credit unions but via individual companies. The interest rates in hard money loans are higher than others, but they help you strike off much quicker if you’ve some cash.
While it is quick to get hard money loans when financing for investment property, experts say that this should be considered only as the “last resort” in real estate investments. The high-interest rate is the primary reason for this.
This is most preferred for property flippers who buy, renovate, and sell properties within a short duration (mostly within a year). So, the loan terms are designed accordingly. You can opt for this only if you have the capacity to pay this off within a short duration.
Despite its limitations, it does offer some great benefits for experienced real-estate investors who know how to make a quick sell in a market.
Benefits of a hard money loan:
- Fast and flexible turnarounds
- Fewer requirements
- It can be approved quickly
- It can help fund your investment property
3. Personal money loans
Using personal money loans for debt consolidation or renovation purposes is quite common, but they’re also very effective at financing investment properties. There are many personal loans available that provide flexible payments with minimal fees.
They can help alleviate the financing process of your property with their many benefits. Personal loans are available through banks, online lenders, and credit unions.
While not as risky as hard money loans, personal loans do carry a certain amount of risk when financing for investment property. For starters, personal loans carry high interest rates compared to home loans.
Considering this, you can use personal loans for property investments only when it is possible to generate solid recurring returns or to do short-term flipping. So, use it wisely if you are using personal loans for investment property financing.
Benefits of a personal money loan:
- Remarkably quick approval
- Lower interest rates than hard money loans
- Flexibility and versatility
- It can help build your credit score (only when paid without default)
4. Federal Housing Administration (FHA) loans
FHA loans are mapped out for borrowers with moderate income. They also don’t require a super-high credit score to get started (just over 580 is enough). However, there is a catch. It is mainly for people who use it to buy their primary residence. So, how you can work around this rule when financing for investment property?
FHA allows borrowers to purchase multi-unit residences (up to 4 units). One should be occupied by the owner, and the owner must move to the property within 60 days of mortgage closure and stay in the property for the most part of a year. FHA rule also allows you to rent out the other 3 units to generate passive income.
There are also some exceptions to the FHA rules. If your job demands you move to a new location, you can rent out your occupying unit as well. Also, if the home is too small and your family is expanding, you can move out after one year of occupancy.
With an FHA loan, a borrower can get access to an investment property with a down payment of just 3.5%. These loans are available through FHA-approved banks and lending organizations and are easy to get started with.
Benefits of a Federal Housing Administration loan:
- Applicants with high debt-to-income ratios are accepted
- Applicants with a lower credit score are accepted
- Lower down payments
- Extended loan sizes are available for financing bigger projects
5. Home equity loans (HELOCs)
In-Home equity loans or HELOCs, borrowers are required to make fixed monthly payments and can get up to 80% of their investment property’s value in loan. This makes them a considerable option when financing for investment property.
The only downside to this method is that borrowers can lose their property in case they fail to make payments timely. So, make sure you opt for this loan only when you are confident of making the fixed monthly payments.
HELOCs are a bit different from traditional mortgages. One key factor to note here is the revolving line of credit. If you have equity on the property, you can get loans whenever you need money.
While the money is readily available, you should be careful not to use this for frivolous reasons. Default on payments might cause you to lose your property.
Benefits of home equity loans:
- Lower interest rates
- It’s Tax-deductible
- Provides a solid amount of money in a short time
- Payments are made with cash
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6. Conventional mortgages
Conventional mortgages are still one of the most popular types of home buyer’s loans. They are provided by private backers such as private banks and credit unions. To get a conventional loan, borrowers need to complete an official mortgage application and must have a good credit score. A conventional mortgage can help you finance your investment property with its many benefits.
Benefits of conventional mortgages:
- Limitless loans
- Applicable for all property types
- Faster loan capitalizing
- Good security options
7. Hybrid financing
Also known as hybrid security, hybrid financing is a financial strategy that combines both equities and debt. It aims to provide virtues of both debt financing and equity financing.
Let’s say, you have about 60% of the money required for financing your investment property. You can raise the remaining 40% from hybrid financing where you have a repayment schedule while also providing a piece of the property ownership.
Hybrid financing tends to generate big returns and is easy to get started with. There are various types of hybrid financing including preference stocks, hybrid bonds, warrants, etc.
Benefits of hybrid financing:
- Higher rates of returns
- Less volatility
- Quicken financing process
- Diversity of your portfolio
Big returns when financing for investment property
For novices, financing for an investment property can appear to be rather difficult, or even impossible, but it certainly isn’t. Even with zero dollars in your hand, you can still invest in various properties and get sizable returns.
Following the above-mentioned methods can help ease up the purchasing process of your first investment property. With the right financing methods and investment property management, you can find success in the real estate investment medium.
We will soon be releasing our full real-estate investment guide with up-to-date information on various modes of financing. Stay tuned!
Also, don’t forget to download our FREE personal finance toolkit that can help you identify the best tools you can use to manage your wealth!