Last Updated on Apr 8, 2020 by James W
One of the greatest misconceptions of investing in real estate is that you need boatloads of money to get started. This isn’t entirely true. There are many financing options available that go unnoticed.
If you’re trying to finance your first rental property, congratulations and welcome to the club!
Below are 5 surefire ways that will teach you how to finance your first rental property.
Option 1: Conventional financing
Conventional loans are between you and the lender. In other words, the payments aren’t guaranteed by either the Veterans Administration or the Federal Housing Administration.
Most lenders require you to put a 20-30% down payment. This steep down payment is often the reason why many people scramble for other financing alternatives.
Option 2: Try an online lender
Conventional financing is no longer the only option for financing real estate investment. Nowadays, more and more people are turning to online lenders for their real estate financing.
Why go for an online lender? The simple answer is: convenience. Online lenders allow you to get things done quickly. Besides the convenience factor, people also choose online lenders because of:
- Easier access. Unlike banks, online lenders aren’t notoriously picky when it comes to picking who they lend money to. However, a great credit score is necessary.
- Lower rates. Online lenders have very competitive rates and fees. This is because, unlike banks, they don’t have the added expense of physical offices scattered throughout the country.
- Partial loans. With online lenders, you don’t have to be approved for the entire loan amount you are asking for. There’s still the possibility of getting approved for just a portion of what you are asking for.
Examples of online marketplaces include Rocket Mortgage, Quicken Loans, LendingTree, and LoanDepot.
Option 3: Gather a group of investors.
Pooling together a group of investors to finance your first rental property is a great way to get your feet wet while spreading out the risk. Let’s assume you’re interested in buying a rental property that’s say $300,00. If you are able to find four people who have no problem putting down $75,000, you can collectively become the property owners and be able to start a cash flow on the property almost immediately.
Besides putting you in a position to start a cash flow much sooner, this method also helps you avoid the potential of foreclosure and gives you more room for your numbers to work out.
But where do you get the right investor for your first rental property? Glad you asked. We asked Costello Realty & Management this exact question. Here were their answers:
- Private equity firms. These give you access to everything from a few thousand to millions in investment.
- Professional social networking sites. Besides LinkedIn, there are a number of other professional social networking sites that can help you connect with various investors. Examples of these sites include Meetup, Cofoundr, StartupNation, XING, and EFactor.
- Small business administration. This option can help you get financing without having interference or expectations that they’ll get a stake in your business. They also offer grants.
- Incubators and accelerators. Good examples of these include Y Combinator, Techstars, and 500 Startups.
- Crowdfunding sites. Crowdfunding sites provide you with access to a variety of investors – from accredited investors seeking new ideas to philanthropists who believe in helping others realize their dream to the general public with an interest to participate in the “next big thing.???
- Angel networks. Examples of these networks include Angel Investment Network, Angel Capital Association, and Funded.com.
Option 4: Ask about seller financing
Also known as owner financing, seller financing is a clever option when you can’t get loans from conventional lending sources. In seller financing, the person selling the rental property becomes your financier.
This type of financing can offer advantages for both the buyer and the seller. The advantages you have as a real estate investor include:
- Fast closing. You can close and move into the property within days.
- There are no loan costs. You are free from appraisal, underwriting charges, origination fees, points, credit reports and a myriad of other “junk??? fees often charged by banks.
- Credit rating. You have an opportunity to improve your credit rating.
- Easy qualification. With seller financing, things like credit scores aren’t necessary.
Option 5: Put down a large down payment.
Another option to finance your first rental property is to hold off for a few months and stash away more cash. This may be a great option if either the interest rate you’re offered just isn’t feasible or you are having trouble qualifying for a mortgage.
If you able to put down a large down payment, you’re able to save considerable amounts on the interest.
If you want to build wealth for yourself, there are few methods as stable as real estate. Investing in real estate is especially effective in building wealth because: real estate is scalable; the income generated is passive; and the real estate value is consistent.