Options for Financing a Rental Property
Renting out a property seems simple enough: you own the place, rent it out to responsible tenants you've screened and collect rent. But how do you even get past that first step? If you don't already own it outright, you'll need help financing a rental property. What are your choices? Well, you have a few.
Residential loans
If you're starting out or just want a couple of properties to rent out, you can get a residential home loan. In most circumstances, you can use a residential loan for up to 4 units, though you should always check with a bank to make sure exactly what they could offer you. If you want to take out a loan on more than four units, you'll likely have to move up to something else.
Commercial loans
Commercial loans are also an option, and likely your main or only choice if you're looking to acquire several properties. The terms are likely to be much different than a residential mortgage since you're specifically taking out a business loan, so like always, make sure to get the exact terms for all of your options before you take out a loan.
Partnering with others
Having more than one person invested has pros and cons. On the positive, you'll have more investment than you could get on your own. On the other hand, you have to split the profits with someone else. It's still much better than not having the property at all, so if you can get a business partner to split profits with, you may be able to avoid the financing stage entirely.
Owner financing
Depending on who currently owns the property, you may be able to make a deal directly with them. Owner financing is when you make payments to the current owner directly, rather than getting a loan through a bank. If the current owner is willing to take payments over the long term rather than cash all at once, you may be able to make a better deal with them than you would get with a bank.
Private investment from family/friends
If you have family or friends who are willing to help you out, you can borrow money from them to get things started. Just make sure that your relationship with them can take the strain that may come up from this kind of financial arrangement.
Combination of the above
If one of the above isn't enough on its own, you can try to combine a few of them. Get creative if you need to, getting a little money here and a little more there, but keep the risks in mind. The more creative your financing is, the more risks it brings with it, so don't get too creative.
Make a larger down payment for better interest rate
The larger your down payment, the less risky a loan to you is. The less risky your loan is, the lower the interest rates are. So, if you can put more money upfront, it can save you a lot over the long term.
Make sure you have strong credit
Good credit also makes you less of a risk. The higher your credit score, the better deal a bank will be willing to give you, saving a lot in interest over the long term.
Get better deals from smaller banks
Don't just look at big banks for business loans. Local banks and credit unions could very well offer you much better deals than you would get for this type of loan, especially if they have any offers or promotions to encourage local businesses.
Know your goal with this investment
Are you trying to start a real estate empire, or just build up a small base of passive income? What's your end game, playing out what you want to do with this property and any others you may get in the future? This will help you understand what to try and what to avoid. If you're just looking for a bit of income on the side, you might want to avoid something long-term that saddles you with a lot of debt, while if you have grand ambitions, that may not be as much of an issue. Having in mind where you want to go will give a lot of clarity for what you'll be willing to do or not to get the financing you need. This is a long-term financial decision, so make sure not to take it lightly.
You have a number of options for financing a rental property, so make sure to consider them carefully before you make any moves. You can get that rental property of your dreams, just carefully consider your options before you sign on the line.
