Real Estate Loans
11 Methods for Financing Investment Properties
There are lots of ways to get real estate loans or investment property loans - often only limited by your imagination. Here's a lengthy list of ways to financing investment property.
This page will provide you with both conventional and unconvential ways to fund your real estate investments. The collapse of bubbles in real estate values is spreading from the US to other parts of the world making potential for bank financing more difficult. Learn some of these unusal techniques to gain an edge in acquiring rental housing when values are low.
The term "real estate investment loans" usually refers to the bulk of the money used to finance an investment 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 weird part about getting loans to fund your ventures, is that the less you need the money, the easier it is to get a loan. So make your finances look better.
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 your credit score. Getting real estate loans from financial institutions is nearly impossible without a good FICO score but there are other sources to consider. If your FICO score is lower than 680 look into creative real estate investing ideas.One thing to keep in mind is that if you are using a bank for real estate 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 Property 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).
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 as a source 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 financing or buying invesment property. You can also use another persons IRA as a source of real estate loans.
Even if you have a 401K and are still working there are ways to transfer funds from that 401K to startup a new business. The US law governing 401K's (ERISA) allows you to "Roll Over as a Business Startup (ROBS) funds from your 401k to start a business. This involves setting up a new coporation, transferring funds from your current 401K into the new company, exchanging stock in the new company in exchange for the cash in the 401K and then using that cash to fund your business expenses.
The ROBS strategy requires some legal help to set up properly. But you will avoid paying taxes and penalties on the transfer and is a great idea if a 401k is your only source of funds.
Hard money lenders are ideal if you can flip your property quickly. This type of investment property financing 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. One source of cash might be IRA real estate investing.
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 and many people use loans for downpayments. 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
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 as investment property loans, so read the information at the link carefully.
Web sites that offer peer to peer lending will give you the opportunity to get real estate loans even if a bank might not be interested in you. Here's some web sites and tips for getting loans.
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.
I used bootstrap financing techniques to create a large portfolio of homes.
No matter what your financial situation, it should not stop you from investing in rental property. Just follow these steps:
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The materials contained on this website are provided for general information purposes only and do not constitute legal or other professional advice on any subject matter.
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