Let’s say you are interested in financing your first investment property. How do you go about securing financing for the property? What strategies do people use to purchase their first rental property? This article will include a list of some typical and some creative ways to finance your first rental investment.
Typical ways to finance an investment property:
- Loan from a bank. You can get a conventional loan for a rental property. You most likely will need 20% down for the loan, but it is possible to finance your first deal by doing a conventional loan
- Private lender. If you know someone who has some extra money lying around or know someone who is willing to give you a loan for a property, you could finance the property in this fashion. Consider finding a cheap property to start and ask a relative or friend to borrow some money. We have found ways to buy houses for as little as $10,000.
- Partner with someone else. This is always an option. Say you have a friend who has always been interested in real estate and you would like to dabble a bit yourself, ask your friend if he is willing to partner with you either for the short term or for the long term.
- Consider a live in investment. Lots of people buy a duplex or triplex and live in one side and make money from the other side(s). You can choose to put more money down each month for the mortgage or use that money as cash flow (money you can save) for future investments. You can also finance the loan by using an FHA loan. You will only need 5% down for this type of loan. Bonus!
- Were you ever a part of the military? Check out a VA Loan. If you were ever part of the military, it is possible to get a VA loan for an investment property with little to no money down. You may need to live in the property as an owner occupant, but it is possible to use the VA loan to buy real estate.
- USDA loan. This type of loan is only available in certain areas, but it does give you the opportunity to buy with little or no money down for an investment property. It is only available in rural areas. You can check the USDA website if you have a property in mind to see if it would qualify for this type off loan. The downside is that this loan can take a while to go through, but if you are patient it may worth it.
Atypical ways to finance an investment property:
- Loan from a 401K or IRA. You can borrow against your 401K or IRA and the interest that you pay on the loan all comes back to your 401K account. Essentially, you are paying interest to yourself whereas a bank, you pay interest to someone else. This is a very valid option to consider if you want to jump into the real estate market. If you have an IRA, the money is accessible for you to use but keep in mind you will have to pay a 10% penalty for taking the money out early.
- Refinance your home. You can refinance your home to get a loan for your first property. This only works if you have enough equity to make it happen. Let’s say you bought a house for $150,000 and you paid the loan down to $100,000. You now have $50,000 dollars worth of equity to borrow from if you find your first real estate bargain. (Dave Ramsey does not recommend this and it can be risky so proceed with caution in doing this)
- Other people’s money. If you can find a home that a seller is willing to get rid of, you can sometimes negotiate that you will pay the seller a monthly payment for the property. So basically, the seller is the bank. Here is the catch… the seller has to own the property outright. They do not have a mortgage on it at all. They OWN the property. Lots of people do these types of deals though so check into this.
- Lease option. This option is commonly referred to as a “rent to own” option. This option requires a down payment (amount may vary). The buyer would pay a “rent” payment for a certain amount of years, and then pay a balloon payment at the end of the agreement. This balloon payment would usually be an amount that you would finance. By the time the balloon payment is owed the property is paid down well below market value, and should have an easy opportunity to get financed.
I will tell you that the first property that we bought, we used some cash that we had available (this was in 2012 so before we accumulated a bunch of debt…although we still had a negative net worth at this time…sigh) and we used some money from a 401k loan. We paid the loan back in full and we paid interest to ourselves. We were the bank for the first investment. It was totally scary and I looked at Greg like he had two heads when he suggested that we do this. But now looking back, we paid off that loan, made back all of the money on the investment and thensome. We also have equity in that property so if we decide to sell it, we make a big profit. Seems worth it, huh.
I hope you have a better idea of some of the typical and creative ways that real estate investors choose to finance their properties. Even if you don’t have a lot of money, read a lot about real estate and figure out a plan of how you could get started. Knowledge is power and being creative with money can pay off in big ways if you are willing to take a bit of a risk.
Have you heard of other ways to obtain creative financing?
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