Types of Financing for Rental Properties

Financing is an important element of many investors strategies. Find out the different financing options in the market and the best fit for your investment strategy.

Owning rental properties can be a lucrative long-term investment that provides a predictable source of income and exposure to appreciation. Finding the right financing is key. Here’s what you need to know about different financing options for rental properties.

Private money. Private money exists as a vehicle to help real estate investors grow their rental portfolio when they can no longer qualify for conventional loans. Typically, these are asset based loans and take intro consideration cashflow, experience, loan to value and credit score. A mortgage and promissory note secure the investment for the lender. There are many benefits such as low-document requirements, no personal income verification, quick closing and they lend to entities.
Owner financing. In some cases, the property’s owner will finance the sale of the investment property. This is only possible for properties that are owned outright and aren’t still partially owned by a bank or other lender. With owner financing, you typically agree on a price and make your payments to the property’s owner instead of a bank or other type of lender.
Hard money. Hard money is typically used for short-term loans—not for buy and hold investments. However, many investors use hard money to purchase and rehab the property with the goal of finding a tenant and refinancing it. While these types of loans consider the value of the property rather than personal income and credit, they come at high interest rates. It is good to know that most hard money loans are interest-only.
Conventional mortgage loans. Typically the process of applying for a rental loan at a bank or credit union is the same as a regular mortgage. The lender will take income and credit score into account to ensure you can cover your current mortgage (if you have one) and the new mortgage for a period of time. Usually six months. Take into consideration that any projected income from rent won’t be factored into your creditworthiness. In addition, most lenders require a 30 percent down payment for a rental investment property.
Borrowing against home equity. There are three ways to do this: a cash-out refinance, a home equity loan or a a home equity line of credit (HELOC). A home equity loan usually allows you to borrow up to 80 percent of your equity in the home at its current market value. You’ll have to make monthly payments that include both interest and principal. A HELOC provides you with a line of credit against your current equity and usually requires interest-only monthly payments. A cash-out refinance is more complicated. It uses the equity you’ve built as a foundation to pay off your current mortgage on your primary property and reapply for a new mortgage. The difference between the two is paid in cash.

How you finance your rental property plays an important role in how profitable your investment is. If you take the time to carefully consider your options, you’ll stand the best chance of choosing a financing option that will deliver the funds you need to make your investment a success—without binding you to unrealistic financial obligations.