Home Insights & Advice How to finance an investment property the right way

How to finance an investment property the right way

by John Saunders
20th Jan 22 4:12 pm

There is never a wrong time to invest in real estate. A real estate investment, especially in property, means you will have a constant income that will continue even after retirement. Besides rental income, your property will be appreciated if you decide to sell it years later.

The truth is not many Americans can afford to purchase an investment property through out-of-pocket funding.

Luckily, you don’t have to have lots of money to own an investment property, as many other financial options exist.

Here are different types of financing you may want to consider.

Hard money lenders

Hard money lenders are private lenders, usually high-value individuals or companies, that finance real estate investors for a profit on borrowed money. While hard money lenders are mainly used to finance, fix and flip kinds of property, you could still use this option to fund your investment property under some circumstances. 

The advantage of hard money lenders is that their approval requirements are less strict than conventional loans meaning you can cash in on a time-sensitive opportunity.

The main drawbacks to hard money are that the turnaround times are short; usually, a couple of months to a year, and the interest could be significantly higher than conventional loans.

You can get help finding hard money lenders close to you on this page on HardMoneyHome.com’s website.

Conventional mortgage loans

Many investment property investors prefer conventional loans, and for a good reason. Conventional mortgages have extended repayment periods that are easy to manage. 

However, financing institutions offering this option may require borrowers to have a good credit score, and loan approvals can take days. In other words, you may lose out on time-sensitive deals. But if you can qualify for a conventional mortgage, it is one of the best ways of investment property financing.

Home equity loans

If you have other properties in your name, home equity loans are an excellent option for you. Many financial institutions usually offer home equity loans and have predefined interest rates and payment periods. In this type of financing, the lender uses the borrower’s existing properties as collateral. 

Typically, a borrower can borrow up to 80% of the existing properties value under this option. Home equity loans also allow borrowers to get money for any other reason other than real estate, as long as they make fixed deposits every month. 

Seller financing

Seller financing is one of the least known real estate financing options. As the name suggests, the funding is provided by the property seller.

However, it doesn’t involve monetary funding per se. Instead, the seller and buyer enter into a contract-like agreement to agree on the number of monthly instalments, the repayment schedule, and interests.

The agreement also outlines the repercussions in the event of defaulting on payments. 

This option is only possible if the seller has full ownership of the property and has no outstanding mortgage payments, which can be rare to find.

Retirement fund loans

While retirement funds are meant for the golden years, borrowing to invest in a worthy cause is a good idea.

Many retirement funds allow participants to borrow from their retirement fund, with the limit often being at $50,000. The bright side to this investment option is that you can still have your retirement secured by your investment. 

Additionally, you can use the returns you get from your investment to service your retirement fund loan, which means you still get your retirement fund at retirement. The drawback to this option is the limitation on the level of financing you can access.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

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