High interest rates and a nationwide housing shortage make for a tough combination for homebuyers and investors alike.
So, what creative financing options do you have while interest rates for investment properties and home loans keep soaring?
Creative Financing Ideas for Lower Interest Rates
Higher interest rates put a serious dent in your real estate cash flow. But if you get inventive, you can reduce your monthly payments and interest on investment property loans.
Try the following ideas to pay less interest to mortgage lenders and keep more cash flow for yourself. And if you prefer video, we quickly walk through five of these ideas here:
1. Serial House Hacking
It’s no secret: lenders charge lower interest rates to homeowners than they do to real estate investors.
And it makes sense. When money gets tight for a landlord, they default on their rental property loan before they default on their home mortgage.
Consider house hacking by buying a multifamily property to score a low homeowner interest rate while building your rental portfolio. After living in the property for one year as your primary residence, you can move out and do it all over again with another property. That means you can add up to four units per year to your property portfolio, all with cheap traditional mortgage financing.
That includes conventional loans from Fannie Mae or Freddie Mac, FHA loans, or even 0% down USDA loans or VA loans. If you don’t know where to start comparing home loans, try Credible* for prequalified quotes from several lenders.
You can also explore ways to house hack a single-family home, such as adding an accessory dwelling unit or bringing in housemates. My cofounder Deni Supplee has rented out storage space, and even gone so far as to host a foreign exchange student.
2. Live-In Flips
Like renovating old homes?
You could flip houses as an investor, of course. But then you pay high interest rates on hard money loans.
Imagine instead that you buy a fixer-upper as a homeowner. You qualify for an FHA 203K loan or some other owner-occupied renovation loan with affordable interest rates. On nights and weekends, you renovate the property, creating equity in it. Then you sell it for a tidy profit and do it all over again.
The profit from the sale could well cover your housing costs during the time you owned the property, offering yet another way to save on living expenses. And if you live in the property for at least two years, you qualify for the homeowner exclusion and avoid real estate capital gains taxes on the first $250,000 of profits ($500,000 if you’re married).
3. Live-In BRRRR
No one says you have to sell the property after you finish rehabbing it.
The BRRRR method in real estate investing is an acronym that stands for buy, renovate, rent, refinance, repeat. When you refinance, you can pull your down payment back out, freeing you to invest it in another property.
But consider a twist on this strategy: You complete the repairs over the course of a year, and then move and rent out the property.
While you don’t get your down payment back, you put down far less than you would have as an investor, and you score a low interest rate indefinitely.
So yes, there’s one less “R” in the acronym. But because you forced equity with the renovations, you now have plenty of equity to offer lenders who offer lower interest rates for more collateral.
Real estate investments? Awesome. Being a landlord? Less fun.
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4. Offer Additional Collateral
As alluded to above, lenders price their loans based on risk. The lower the risk of your loan, the lower the interest rate and fees you can expect to pay.
So, as you approach lenders to price out investment property loans, ask them if they can reduce the interest rate if you put up another property as additional collateral. Some won’t take you up on it, but private portfolio lenders offer flexibility in addition to speed. Try Kiavi, Lending One, or Visio as fast, flexible portfolio lenders.
5. Rotating Business Credit
Ready to get a little counterintuitive?
Real estate investors qualify as business owners, and therefore qualify for unsecured business credit lines and credit cards. Using a business credit concierge service such as Fund&Grow, you can open up to $250,000 or more in rotating business credit, with no liens against property.
Sure, these will come with relatively high interest rates. But they often offer 0% introductory APR periods up to 18 months. That means you could borrow the down payment or even cover the cost of a property with business credit and get up to 18 months to pay it off before you start paying interest.
You could pile every spare dollar into paying off the lines of credit before that time, and avoid interest altogether. Or you could refinance the property before then and cross your fingers that interest rates go down between now and then.
6. Negotiate Owner Financing
Some sellers don’t mind holding a note to cover some or even all of your purchase. They get to collect interest between now and when you pay off the loan in full, providing passive income for them and flexible financing for you.
The down payment, interest rate, fees, and loan term are all negotiable. In fact, it doesn’t even occur to many sellers offering owner financing to charge you points or fees at closing. That can save you thousands of dollars in financing costs immediately.
Most owner financing notes come with a balloon payment, requiring you to pay them off in full within three to five years. By that point, hopefully interest rates have dropped and you can refinance at a lower rate.
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7. Negotiate an Interest Rate Buydown with the Seller
Everything in life is negotiable. A motivated seller may be willing to put a little money toward helping you buy down your interest rate.
Mortgage rate buydowns vary, but typically you pay an upfront fee to reduce the interest rate, either permanently or for the first couple of years. For example, a 2/1 buydown drops your interest rate by two percentage points in the first year and one point in the second year. Again, it gives mortgage rates some time to drop down, rents to go up, or ideally both.
When you make offers, bounce the idea off of sellers to see how they react. It offers one more way of seeing who wants to sell urgently.
8. Combine an ARM with Quick Payoff
Adjustable-rate mortgages (ARMs) come with the lowest rates of any loan type — at least until the initial interest rate period expires in three, five, or seven years. Then it switches over from a fixed-rate mortgage to adjusting to market rates.
That gives you a lower monthly mortgage payment for a few years at least. After the introductory period ends, the federal funds rate or other rate benchmark may have dropped, leaving you with an acceptable loan rate.
Or not, of course. To hedge against rate increases, you could funnel money toward paying off the loan early. Bear in mind how loan amortization works: you pay the highest interest early in the loan schedule. By the time the introductory rate ends and the adjustable-rate loan kicks in, you could have skipped far ahead in the amortization schedule, avoiding high interest in each monthly payment even if the loan rate technically ticks upward.
As an added bonus to paying down the loan quickly and skipping the worst of the interest, you can also ditch private mortgage insurance (PMI) if you’re using a conventional mortgage.
Final Thoughts on Financing Properties While Rates Are High
High interest rates won’t last forever. But refinancing is expensive, and you have no way to predict when rates will fall. Think twice before counting on a refinance within the next few years.
Instead, consider using the debt snowball method to knock out your mortgages quickly. With each loan that you knock out, you supercharge your cash flow, letting you funnel more money into the next mortgage loan — or into new investments.
Lastly, working building your credit score in the meantime. Higher credit scores mean lower mortgage rates and closing costs for future loans, both as a homeowner and a real estate investor. It may not be sexy, but it does deliver a lower mortgage interest rate.♦
How have you scored a lower mortgage interest rate? What are your best tips for lower mortgage rates?
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*Credible Disclosure: Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.
Credible Operations, Inc. NMLS# 1681276, “Credible.” Not available in all states. www.nmlsconsumeraccess.org.
Who's the Author?
G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate. If you want to be one of them, join Brian and Deni for a free class on How to Earn 15-30% on Fractional Real Estate Syndications.