We live in a beautiful time, where most people around the country can become real estate investors if they are willing to put in the work. In the past, this investment arena was very hard for the average wage earner to participate in, and was dominated by those with the most capital.
But today, financing for real estate has never been more accessible to most people. From loans with low down payment requirements to investor-focused loans and unique solutions for growing your rental portfolio, there are many ways to get a loan for an investment property.
If you are ready to start building wealth, growing your net worth, and generating passive income, it’s time to start investing in real estate. Keep reading learn all about investment property financing, to discover which strategy is right for you.
Why You Need a Loan for an Investment Property
Many old-school investors might think that paying cash for an investment property is a good idea. After all, you wouldn’t have to deal with a loan, wouldn’t have to pay interest, and wouldn’t have any risk, since you own the house free and clear.
But is this a good idea? Most modern investors don’t think so. That’s because leverage is a powerful thing.
Only in very few instances will someone lend you money to make an investment that will generate passive returns and appreciate in value every year. But with real estate, that’s exactly what happens when financing an investment property.
Plus, getting a loan for your rentals means that you can multiply the number of homes you acquire much quicker. For example, you could buy a $200,000 home with cash. Or, you can use that $200,000 to put a $40,000 down payment on five properties.
Would you rather have five properties earning you cash flow and appreciating in value, or just one?
Choosing a Loan for an Investment Property
Wondering how to get a loan for an investment property? There are many different types of loans for investment property and each will have unique requirements. Here’s where to start.
House Hack With an FHA Loan
One of the most popular strategies for newbie investors to break into the big world of real estate is to house hack. What is house hacking?
It’s when you buy a property with multiple units. Say you buy a triplex. You will live in one unit, and rent out the other two units.
The benefit of doing this is that you can get a personal mortgage, rather than an investor mortgage, which comes with lower down payment requirements and lower interest rates.
It’s a great first property. And it’s even better when you get an FHA loan. These loans are backed by the FHA and only require 3.5% down. Plus, you can get one, even if your credit score isn’t too high.
After a year or so, you can move out of the property and rent all of the units out for cash flow. Or just stay in the property, living rent and mortgage-free while you save up for your next investment.
A Conventional Investor Loan
Many lending institutions provide traditional mortgages for investment properties. They are essentially the same as getting a personal mortgage but have a few stricter requirements.
The down payment is usually fixed at 20%, though some lenders can require as much as 30% down. Credit score requirements will be higher, and cash reserves to cover a few months of mortgage payments will be needed as well.
VA Loan for Investment Property
If you are a service member and meet all of the requirements, you could qualify for a VA loan. These are some of the best possible loans to get, which most veterans use for their primary residence. But you can also use a VA loan for an investment property.
VA loans don’t require a down payment. That means you can acquire a property for almost no money upfront, though there might be a few fees you’ll need to pay in cash. But the down payment and closing costs can be rolled into the loan.
Getting a VA loan for investment property is one of the most powerful strategies for jumpstarting your portfolio.
If you don’t qualify for traditional financing, you can always turn to private lenders or hard money lenders. Though, you have to convince them that you are reliable, will always make payments, and show them a deal worth investing in.
You might pay more in interested using this strategy, but if it’s your only option, it’s worth it.
Using the BRRRR Strategy
The BRRRR strategy has been growing in popularity lately, It’s a method of investing that allows you to recycle your funds into multiple properties, so you don’t have to spend many months or years saving up for another down payment.
BRRRR stands for buy, rehab, rent, refinance, and repeat. And if done properly, can multiple the number of properties you can get each year.
Getting a Loan
So what does it take to get a loan? One of the most important factors is having steady employment history. Lenders like to see two years of consistent work history at your current job, or in your current business if you’re self-employed.
So don’t change jobs before you want to get a loan.
You’ll also want money saved up for a down payment, closing costs, and reserves. For investment properties, lenders like it if you have three to six months of reserves to cover mortgage payments, in case the property sits vacant for a period of time.
And your credit score is a huge factor. The higher, the better. Take time to improve your score before applying for a loan. One of the easiest ways to do this is by paying down, or paying off, any consumer debt like credit cards.
Lowering your credit utilization will improve your score quickly. Then, it’s just a matter of applying for investment loans and getting multiple quotes to find the best lender to work with.
Knowledge Is Key
There’s a lot to consider when choosing a loan for an investment property. Most investors use a variety of different loans over the course of their investment careers. That’s because each loan has its pros and cons under different circumstances.
So study up on each strategy since you’ll likely need to use multiple funding sources in the near future.
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