6 METHODS TO FINANCE RENTAL PROPERTIES
February 10, 2015 By Larry Arth
Working with hundreds of investors each year one very common question I get asked about how to finance rental properties. There of course are many options available, but it is important to note that as economic times change so do financing options change. Let’s take a look at some of these options and I will suggest the when and where to capitalize on them.
Let’s start with some of the newer and more interesting loans first.
Sources To Finance Rental Properties
When you are looking at how to finance investment properties, there are some considerations that you need to bear in mind. Will the lender finance the type of property you want to purchase, how will your credit-worthiness effect the loan and will you carry the note or have a third party handle it.
Here are six ways to finance rental properties:
Multiple Property Loans
If you already own properties or want to buy more, you know it gets more and more difficult to get financing. Well, you will love this one. This is a newer product for residential rental properties such as single family and properties that are 1- 4 units in size. This is a unique loan designed for the investor who wishes to acquire multiple properties.
Many residential lenders will only finance you up to 4 properties. This is a commercial product where you can literally buy as many properties as you want. The minimum is to have 5 properties and these can be properties you already own and put them onto one loan or buy multiple properties and put on one loan.
These properties can be anywhere in the U.S and the great thing is they can also be non-recourse loans. This loan, depending on how you structure it, may or may not be attached to your FICO credit score. It can be structured as a non-recourse loan where it is simply financing on the financial merits of the property instead of your creditworthiness.
Private Money or Angel Investor Loans
There are indeed many private investors who have lots of money that they want to get a good return on. They understand that a tangible product is a good source to get a safe return. These private lenders are found all over the country. Simply google private lender and your city and you will find local sources that will connect to them.
These investors are often called angel investors as they are easier to work with and cost less than a hard money lender. Remember a private money (angel) lender is more interested in you as a person and the qualifications you have as an investor. Your credit score is usually not important. They are financing you as a person and your property for its financial merit. This loan does not attach to your FICO credit score.
Hard Money Lenders
Used typically when rehabbing properties. These are short term loans where the acquisition costs of the property as well as the rehab work can all be rolled into one loan. The lenders are private investors who typically have invested in large amounts of property over the years and understand the dynamics of investing. These loans are usually more costly to acquire but as they are short term loans can be a very lucrative way to finance a flip. Again you can google hard money lenders in your city and be connected to many sources. This loan does not attach to your FICO credit score.
Perhaps an investor’s favorite way to finance is the quintessential sellers financing. Typically found in economic times of hardship. When homes fail to sell due to a lack of liquidity within a normal banking market eager sellers are willing to sell their properties to you and take installment payments of the purchase as opposed to having to wait for you to get conventional financing. Remember of course typically a seller has to own the property free and clear or at least have a large equity position in the property in order to be able to carry the financing for you. This loan does not attach to your FICO credit score.
This one is more controversial, there are right ways and wrong ways to do these. Essentially you are buying a property that has a loan on it. You are making payments to the seller and the seller is making payments to the bank. For example a seller may pay $500 per month for a mortgage payment. You buy from him or her and agree to pay them $600 per month. The seller profits $100 per month.
Each existing lender and or state has their own laws and rules around the subject to loans so I always advise this agreement to be written by your attorney. You want to have provisions in the loan to insure when you make payment to the seller that indeed he makes payment to the bank or you may risk losing the house to a foreclosure if seller fails to make payment. These loans are typically available to properties that are sold from one investor to another as it requires a certain amount of real estate knowledge.
This is your typical Bank loan. Attaches to your FICO credit score.
If you have any questions about how to finance investment properties, I can definitely give you a great overview of available options and help steer you down the right path. Give me a call today to find out more! 941-718-7761