One of the great advantages of real estate over other types of investments?
In a word, leverage. You can finance 80%, 90%, even 100% of your investment.
If you’ve ever tried doing that with stocks, well… good luck finding a lender.
Not only can you finance most of your acquisition costs, but there are seemingly endless options to do so.
I surveyed professional real estate investors about how they approach rental property financing, and their tips for doing so with minimal fees, interest, and down payments. Here are eight investment property financing ideas, direct from the pros.
1. Pooled Funds from Private Investors
Private funds from friends, family, and acquaintances are the ultimate goal for many real estate investors.
But it takes trust, and trust takes a track record of success. Don’t expect your investment property financing to start out this way.
If you’ve been around the proverbial block a few times, and have established credibility with your friends and family, consider raising some private funds from them for your next real estate investment project.
One perk of this approach? You can often combine it with other forms of financing, such as a rental property mortgage from an online lender.
Here’s how Shawn Breyer of Breyer Home Buyers uses private funds:
“We use partners to put together small commercial multifamily deals and then we buy them out.
“I’m the one who sources the deals, performs due diligence, finds and manages contractors, and sets up and manages property managers. The partners that I bring in are other real estate investors and business owners that I’ve met through networking. We set up the terms on the deal and if they want in, we provide them with an annual rate of return over a specific payback period.
“Normally, we are able to rehab, rent, and refinance the properties within a year, so our velocity of money is high. We are able to keep their money working for them while we snowball our portfolio.”
2. Local Banks (“Portfolio Lenders”)
Whether you’re looking for commercial or residential investment property loans, local community banks – who keep loans on their own portfolios – can make great financing partners.
Nick Evans of CinchSell gets his long-term rental property financing from local banks. “Money can be easy to find if you’re bankable. Now, that also means paying taxes; you need to report your income, so you can provide tax returns to lenders.
“You can’t tell lenders you make X, and then have a tax return that says you make X minus all your ‘expenses’.”
By all means, take advantage of tax deductions for landlords. But don’t abuse them or misreport them to the IRS – even if they don’t catch you, it will make it that much harder to procure a rental property loan.
3. Conventional Rental Property Mortgage Lenders
Conventional mortgage lenders were around 50 years ago, and they’ll be around 50 years from now.
While conventional mortgage lenders usually aren’t the best option for flips, they can be great for your first one, maybe two rental property loans. Why only one or two? Because conventional lenders operate within tight credit guidelines.
First, they almost always report to the credit bureaus. That means your conventional rental property mortgage will appear on your credit report.
Which is fine for one or two mortgages. But most conventional lenders won’t lend to you if you have more than a couple mortgages appearing on your credit report.
The good news about conventional rental property mortgages is that they tend to be less expensive than other financing options. Lower interest rate, lower points and closing costs, the works.
Still, they come with other headaches beyond credit reporting. “The amount of paperwork and documentation required can be intense and painful,” explains Nichole Stohler of Gateway Private Equity Group. “The tradeoff is that we’ve been able to lock in historically-low fixed interest rates for 30 years.”
Think of them as training wheel rental property loans. Great to get started, but then you’ll want to move on.
But move on to what?
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4. Online Rental Property Loans
One of the most viable alternatives to conventional mortgage lenders is online lenders who offer rental property loans. The interest rates and lender fees tend to be similar or only slightly higher, but the lenders can often settle faster, and many don’t report to credit bureaus.
We’ve evaluated and compared several online investment property loans so you can look at their pricing and loan terms side by side in a chart. But there are plenty of other investment property lenders out there, that we have haven’t had a chance to vet yet.
Nichole Stohler has had good experiences with Quicken Loans: “For single-family rental properties, Quicken has been fantastic. They have amazing technology that makes the loan process less cumbersome and I’d finance all homes with them if I could.”
Why can’t she use them for all of her investment property loans?
“I’ve found that if you are buying a lot of homes in a short period of time (I bought eight in less than a year), rotating lenders is required because the underwriters at any single lender get nervous about the buying speed.”
5. Seller Financing
Been waiting patiently for seller financing to appear on the list?
Seller financing is one of those funding techniques that works great… when you can negotiate it. But you certainly can’t count on it.
Remember Nakeisha Turner, the single mom real estate investor who lives and invests in urban Baltimore? She finances many of her deals with seller financing. A specialty niche of hers is to speak with people in her target neighborhoods who inherit their parents’ properties free and clear, and who don’t have the money to renovate them.
(Wondering how she finds those deals? Try out off-market dealfinder PropStream.)
Her offer goes something like this: “The property you inherited is sitting there collecting tax liens and vacancy fines from the City. I’m interested in turning it into a rental, and I can send you monthly payments, so the property becomes a source of income for you. What are your thoughts?”
Not a bad approach, eh?
When you’re negotiating with a seller, it doesn’t hurt to raise the question of seller financing. Try to ask the seller directly, rather than through an intermediary Realtor – you want to read the seller’s reaction to see if they could be open to it, or whether it’s a hard no.
6. Hard Money Loans
We’ve already covered hard money loans for real estate investors at some length, but no list of investment property financing options is complete without it.
Andrey Sokurec, co-founder, and CEO of the real estate investment company Homestead Road explains why he likes hard money lenders for initial property purchases, despite their high cost: “A lot of times it’s much easier and faster to get funding from hard money lender than banks. Most hard money lenders don’t require financial information from the borrower and lend money based on the value of real estate.
“However, they charge higher rates. It’s common practice for hard money lenders to charge 1-4% upfront in points and 8-14% annual interest rate.”
If you need to settle quickly, with less red tape to wade through, sometimes hard money loans are the perfect tool for the job.
For flips, you can simply pay off the loan upon selling the property. If you want to the keep the property as a long-term rental, you can refinance after the renovations are complete, for a cheaper 30-year rental property mortgage.
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7. Lines of Credit Against Your Other Properties
Have equity in your home, or in your other rental properties?
You could be perfectly poised to take advantage of flexible, relatively affordable financing for new investment properties.
If your equity is in your home, you can borrow a HELOC (home equity line of credit) from most banks, credit unions, and conventional mortgage lenders. Easy-peasy.
Have equity in a rental property, or perhaps in several rental properties? “One of my favorite ways to finance a rental property is by using a HELOC from another of my properties to provide the funds for a large down payment or payment in full,” explains Lucas Hall, Head of Industry Relations at Cozy.
“Once the new rental property has been renovated or has some decent equity, I will refinance it and pay back the original HELOC, thereby keeping all the debt on each respective property. Doing so is just one easy way to keep my portfolio organized.”
Not a bad source of financing for rental properties, eh?
8. Crowdfunding Websites
A relatively new entry in the field, crowdfunding websites like Patch of Land offer affordable short-term financing for fix-and-flip deals.
Expect to pay interest rates in the 8-10% range, with a down payment in the 10-20% range. Still often better than a hard money lender!
It’s less common to find affordable long-term rental property loans from crowdfunding websites. Use crowdfunding for short-term bridge financing, and stick with online landlord lenders like Visio or LendingOne for long-term rental property financing.
Lessons on Lenders: Final Investment Property Financing Tips
Here are some recurring themes that came up again and again, as I interviewed professional real estate investors about their favorite financing for investment properties:
Homeowners don’t need relationships with lenders, because they only work with one every few years at most. Investors do need strong relationships; their ability to buy new properties (and, you know, earn a living) depends on their ability to get financing.
With relationships come trust and speed – with a single phone call to the right investment property lender, a real estate investor can line up financing for a rental property or flip.
Alex Terauds, Partner and Director of Finance at the Connor Real Estate Group, recommends you “work with a mortgage broker that has significant experience doing deals similar to yours. It is important to get to know your lender first before committing. Choose your lender thinking about the long-term and not just the first deal.”
Have Several Lenders for Every Type of Real Estate Deal
Flip houses? Build relationships with not one, but several fix-and-flip lenders.
The same is true for long-term rental property financing, for HELOCs, and so on.
You never know when one lender will say “No” to a deal, or why. Maybe they’re a local bank thin on capital that month. Maybe they don’t like the market where your next property is located.
Sometimes, an investment property lender just won’t like your deal for whatever reason, even if you think it’s a home run. (Although if a lender doesn’t like your deal, make sure you double check all your numbers and projections!)
Matthew Miller, owner of Stockpile Property Ventures, likes to keep several local lenders close. “Get approved with at least two local direct lenders. A good lender is a necessity for new investors when they are starting out.”
Real estate investors need to stay capitalized because they never know when a project will go over budget, or take three months longer than expected, or when a furnace will need replacing in a rental property.
“Don’t get into a project you are uncomfortable with or one that will spread you too thin financially,” recommends Matthew Miller. “Just because someone will give you a loan on a property doesn’t necessarily mean it’s a good deal! Have liquidity available to invest with or start wholesaling to build up your liquidity before doing a rehab project.”
Include Financing Costs in Your Profit & Expense Forecasts
It may sound obvious, but far too many new real estate investors underestimate the costs of financing investment properties. Not only do investment property loans usually come with points, but they’ll also charge “junk fees” and other closing costs, and may force you to use their (more expensive!) title company.
Which says nothing of the carrying costs, which investors should budget for at least three months longer than they plan. Renovation projects blow their timetables all… the… time.
Does your bridge lender charge an inspection fee to release draws? Include them in your budget!
“Make sure you take financing and processing costs into account when underwriting potential investment properties,” explains Scott Pollard of Houndstooth Capital Real Estate. “Also, be conservative on the time it takes to sell. It may be a hot market but baking in some extra time if anything unexpected happens is always a safe practice.”
What are your favorite ways to finance investment properties? Have a favorite lender or financing tip? Share them below!