Real Estate & Around the House

A Beginner’s Guide to Financing an Investment Property

March 24, 2022

Today, the average down payment for a new home in the United States is about $59,880. That’s a large chunk of money and you might wonder how you can fund that, especially when you’re looking into an investment property. 

While the prices of homes today can seem frightful, the options for financing an investment property are so delightful!

Read this guide below on your different options for paying for your investment property today.

Hard Money Loans

The good news about hard money loans is that they often have lower qualifying factors than conventional loans. Hard money loans are based on the property instead of your credit history or income. You can find hard money loans through companies such as Trinity Mortgage Fund

When you’re getting money for an investment property through a reputable lender, their rates will typically be based on the market value of the home. They do have high-interest rates, but they’re short-term loans. They’re often used for upping an offer on a property in order to acquire it. Another commonly used strategy involved contacting a lender for Hard Money Loans Miami (or elsewhere more relevant) in order to finance renovations on a property bought at a low price, after the renovations are made the property is then listed on the market for a significant profit, which pays off the loan without much lead time.

Conventional Loans

Conventional loans are based on the guidelines set by Freddie Mac or Fannie Mae. They’re not backed by the federal government like the USA, FHA, and VA loans are. 

You’re often expected to pay 20% down of the home’s price. If it’s an investment property, the bank might require you to put down 30%. 

Banks will take a look at your credit history and score. Your score will also determine the interest rate that you’ll receive.

Your assets and income will also be a factor. Many lenders will expect you to have 6 months of money for mortgage payments. 

Private Money Loans 

Private money loans are from an individual instead of a bank. These could include friends or family members. 

If someone you know can’t afford this, you could look into real estate investment networking events. The terms of the loan and interest rate can vary. 

They often have a legal contract in case you default on payments. The lender might be able to foreclose on the property if you don’t pay your mortgage bill. 

Multifamily Investing

Multifamily investing is when you buy a property with multiple units and you live in one. You’ll be able to finance it as a primary residence as long as you live in it. 

When you go this route, it’s easier to receive reserve and credit requirements. Interest rates tend to be lower for primary residences as well. 

Many of them can be bought without 20% down. Some loans include VA or FHA mortgages. 

For an FHA mortgage, you need to put down 3.5%. Keep in mind that you’ll still need to pay for PMI (private mortgage insurance) until you have 20% down. 

A way around PMI is a VA mortgage if you are or were in the military. 

The great part about multifamily investing is that some lenders might only require you to stay there for a year. That allows you to rinse and repeat the process. Remember that you’ll have to live there, and if you don’t, you could suffer large penalties. 

The Different Methods for Financing an Investment Property

After exploring this guide on the different methods for financing an investment property, you should have a better idea of which would be best for you. Take your time speaking with a lender to explore your options. 

Would you like to read more informative and educational content? Be sure to check out our other articles today! 

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