Did you know that there are almost 20 million rental properties in the United States? Investing in rental properties can be a lucrative venture, providing a steady stream of passive income and long-term wealth-building potential. However, securing rental property financing can be a challenging process, especially for first-time investors.
In this article, we will discuss five key tips for how to finance a rental property.
1. Conventional Bank Loans
For those that already own a home, you are familiar with conventional financing. Conventional mortgages follow the Freddie Mac and Fannie Mae guidelines. One key difference between a home loan and investment property loan is the down payment requirement.
The minimum down payment for an investment property is usually 30% vs. a traditional home loan where it’s normally 20%.
2. Investment Loans
Investment properties or rental properties can be purchased with a low doc loan just like a home loan. The rental income that is projected to come from the property is taken into account.
Keep in mind that only 75% of the rental income is used in the calculations because of the possible vacancy period in between. The interest rates on these loans tends to be a bit higher because of the Reserve Bank capital requirements. You can learn more about investment loans to see if this is the best option for you.
3. VA Multifamily
Active duty service members have the option of taking out a VA loan for investment property. The VA multifamily loans are also available for eligible spouses and for veterans. A bonus is that there is no minimum credit score and the down payment is 0%.
You are allowed to purchase a multifamily property with 2-4 units, but as the borrower you have to live in one of the units and use it as your primary residence.
4. Private Lenders
There are private lenders that will invest in debt instead of equity. Typically, private lenders are real estate professionals that are familiar with the market. They will give you the funds to finance the rental property.
The bonus with this option is that the approval requirements might be a bit more relaxed than with taking out traditional loans. Also, the funding timeframe is faster.
5. Portfolio Lender
These are small, local community banks that keep the mortgage loans they originate on their own books rather than selling to other agencies like Fannie Mae. There is more flexibility with the loan terms and conditions because they are designed to meet the needs of the lender and the borrower.
Borrowers that have a lower credit score or high debt-to-income ratio can benefit from a portfolio lender option.
Now You Know How to Finance a Rental Property Like a Pro
Now that you know how to finance a rental property you can agree that financing a rental property requires careful planning. Remember to seek advice from experienced real estate professionals, mortgage advisors, and financial planners to make informed decisions that align with your long-term investment objectives.
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