Many first-time investors, especially young people, are unsure how to begin building their investment portfolio. Fortunately, there is one way to invest that nearly all investors can take advantage of: buying rental properties. Here we cover how to finance your first rental property.
How to Finance your First Rental Property – Overview
Rental properties are a great way to see a return on your investment immediately. This is true as long as you have a steady stream of renters. Additionally you may end up liking being a landlord. This can easily become a very lucrative small business venture or side hustle.
One of the most important aspects of owning rental properties is the initial cost of buying the actual property. It is possible to get a traditional mortgage from a bank. However this may not always be the best option for first-time investors or buyers without the cash for a down payment.
Fortunately, there is another way to finance your first rental property. It can can be quicker (and easier) to obtain, allowing you to see a quicker return on your investment. It can help you invest in more property or other ventures, thus, building your investment portfolio (and your bank account) that much faster.
Before you Buy
The first thing you have to consider when deciding to invest in rental property, before you even get to the issue of financing, is whether you want to invest in long-term rentals or short-term rentals (a.k.a. residential vs. vacation properties).
Which property type you decide to buy will probably influence where you decide to buy your property. For example, if you wish to buy a vacation rental, you may look at cities that have a higher amount of tourists. If you decide to buy a residential property, you may research cities classified as “college towns.” You may also want to look into areas where there has been an economic boom. This could result in a larger migration of young professionals and recent graduates looking for cheaper housing.
There are pros and cons to both types of rental properties. It is wise to do your research and decide what is best suited to your personal and professional goals for your investment.
Financing Your Investment
Once you have decided what kind of property you are going to buy and where, as well as found the actual property itself, it is time to finance your purchase. As mentioned above, you could decide to go with a traditional mortgage. As a first-time investor (and possible homeowner yourself) you may not have the funds in the bank for a significant down payment.
Even if you do have the down payment, you are looking at a long process. The bank is going to go through your credit reports, bank statements, etc., just as they would if you were trying to get a personal loan and mortgage for your own house. The upside to this process is that your interest rates will be on the lower end of the scale.
If you find yourself in a position where you cannot afford a down payment and have a subpar credit score, fear not. This does not keep you from investing and improving your financial status. In your case, you might very well benefit from a hard money loan.
A hard money lender is a private lender who can get you money faster and with fewer stipulations. Hard money lenders do not rely on credit reports and down payments. Instead they use collateral in the form of real property. This could be a perfect option for those who find themselves unable to get a traditional mortgage.
However, the interest rates associated with hard money lenders are often higher than traditional routes. Typically the rates are closer to 13% which is higher than the 3%-5% you can expect with a traditional loan.
While a higher interest rate may seem scary at first, there are programs that can help you pay off your hard money loan faster and in a collaborative way. This means that you are not necessarily in a high-risk situation.
Before deciding what financing route you want to take, there are several things you can do. First off, shop around for the best rate. Also be sure to reach out to your trusted financial advisor or accountant with any questions.
How to Finance your First Rental Property – Summary
Working to build your investment portfolio while you are young can help you build credit, pay off loans, and achieve financial stability. All of this earlier than you might have otherwise been able to.
Investing in real estate and rentals is a great way to do this. Especially considering there are ways for even first-time investors to finance a rental property. All it takes is a little bit of nerve and a lot of research and planning. You could soon be receiving a substantial return on your investment!
For more articles like this be sure to check out the real estate section of the blog.