Real Estate Loans

Financing Investment Properties

There are lots of ways to get real estate loans - often only limited by your imagination. Here's a lengthy list of ways to finance your investment rental property.

The term "real estate investment loans" usually refers to the bulk of the money used to finance a property purchase and assumes you have a cash down payment. But we are going to use the term broadly and include ways to get money if you don't have cash for a down payment.

Now, I'm not your parent or your spouse, so I'm not going to nag you. But... if you're spending more than you make, you need to get your house in order. Create a budget and add a category for savings. Save some money from your paycheck each pay period towards a down payment for your investment properties as well as cash reserves.

The next step is making sure your credit score is OK. Often called the FICO score, you can find your free credit Score online instantly! Hopefully it's over 720 or at least 680. If not, here's how to find out what it is and some suggestions for improving it. Getting real estate loans from financial institutions is nearly impossible without a good FICO score but there are other sources to consider.

One thing to keep in mind is that if you are using a bank for rental property loans, your interest rate and down payment requirements are generally higher. If you are going to rent out your current home and buy a second property to live in you can get a better interest rate.

Do not lie to the bank and tell them that you are going to live in an investment property.

This is loan fraud. If you are going to buy a lower priced property and you intend to live in it the bank might be suspicious of loan fraud, since generally people move up, not down, although in these times you could make a case for down sizing. If you buy a home, live in it for two years (best for tax purposes). Then when you rent it out, you are not doing anything illegal or unethical.

How to Finance Investment Property

Finding Investment Property Mortgages

Get Investment Loans from Local Banks

One of the best sources for investment property mortgages could be a small local bank. After the first couple of real estate loans, all I had to do was call my banker and presto! my loan was approved. I purchased over a dozen properties this way without much effort (and this was long before no doc loans). If you live in a small town where you can build rapport with a banker (and the bank is not some big conglomerate) then you might try this approach.

After the 2008 bank crash, small banks are more likely to lend money for investment property than the larger banks served by mortgage brokers.

Find Mortgage Brokers for Real Estate Loans

During the past few years I've lived in a larger metro area and did not have a personal banking relationship. So I searched out a real estate mortgage broker. Mortgage brokers tend to have links to dozens or hundreds of bank programs. It's more likely that they can find rental property loans for you.

A mortgage broker has much more flexibility to tailor an investment property loan to you if you have unique circumstances.

Use a Self-Directed IRA for Invesment Property Loans

One option that few people know about is that an IRA can be used to invest in more than stocks or bonds. You can use them for all kinds of activities. You cannot use them to buy your own home, but you can use them for investing in rental property. You can also use another persons IRA as a source of real estate loans.

Hard money lenders are ideal if you can flip your property quickly. This type of real estate investment is better suited for the professional flippers than for anyone that is going to buy and hold the property for any length of time. You will need to be able to buy houses at large discounts, use a professional crew to rehab quickly and market and sell the property fast.

Cash - The Ultimate Real Estate Financing Tool

Using cash to buy a property will give you tremendous leverage when purchasing investment rental property. As you look for investment rental property, build your cash reserves from savings, private investors or one of your retirement accounts. Sellers will give you greater discounts for cash sales.

Saving your money for the down payment is the healthiest way to invest in rental property. Creating a special savings account for investment rental property should be your first priority.

But there are lots of other ways to get the down payment money. It is important to have the money in your account at least two (preferably three) months before you apply for a loan, since the banks often want to know the source of money for the down payment. Many will ask for two or three months of checking account records. If there's no money in your account, they might decline your loan request.

Finding Money for Property Down Payment

Using 401k Loans for Real Estate Investing

Most 401k plans include an option to take out a loan. In this time of falling stock values, a nice return in your 401k might be a good thing to have. There are many pro's and con's to using 401k loans for investment property, so read the information at the link carefully.

Web sites that offer peer to peer lending will give you the opportunity to get a real estate investment loan even if a bank might not be interested in you. Here's some web sites and tips for getting loans.

Use Seller Financing for Financing Investment Property

Few people think about the seller as a source of real estate loans, but this might be your best bet if your credit sucks. Here's some ideas that you can use. I've put the seller down as a source of funds for the down payment but they also could be the major source of funds as well.

Use a HELOC for a Rental Property Down Payment

If you already own your home, consider getting a HELOC. Often there is no charge to do this and you don't have to get the funds until you need them.

I have also found that after a loan is "seasoned" (that is, you have made payments for 12 months) and made some improvements to a rental property, the property will be worth more. You can then get a HELOC on your investment rental property. This is non-taxable income that can be used to purchase new properties.

During the current bank crisis, local banks that you do business with are much more likely to give you a HELOC on rental property than large national banks.

Personal Loans for Real Estate Investing

Those with good credit can often get unsecured loans, a line of credit or a large credit card cash advance. I'm not too keen on using credit card cash advances since the interest rate is so high.

Relatives as a Source of Real Estate Loans

Do you have parents that would loan you some money? Maybe they have an IRA that could be converted to a self-directed IRA. Here's some tips on do's and don'ts for family loans.

No matter what your financial situation, it should not stop you from investing in rental property. Just follow these steps:

• cut your expenses and save
• improve your credit score
• look everywhere for real estate loans

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