Property Management Blog

How to Finance an Investment Property

System - Friday, September 29, 2023
Property Management Blog

Investing in real estate is the dream for most individuals or households. Owning investment real estate will offer you consistent income, serve as a hedge against volatile economic markets, and tax advantages. 

There are many forms of investment properties in the current market. You can invest in commercial real estate, fix and flip properties, or multi-family units. If done right, you will be able to diversify your income, build your portfolio, and also enjoy consistent rental income. 

But unlike other investment options such as stocks and bonds, real estate is quite the capital-intensive market. There are significant costs to investing in real estate. 

This means that you will have to secure financing in one form or another. In this article, the team from SGI Property Management breaks down the various ways for you to get financing for your investment property. 

Bank Loans 

If you already have a primary residence, you might be familiar with the process of acquiring conventional financing. 

Conventional bank loans expect a potential lender to make a deposit of 20% for their property. This applies to a primary residence. However, for an investment property, you might be required to make a deposit of 30% of the purchase price or higher. 

Applying for a bank loan doesn’t mean that you will automatically secure it. The bank will need to look into your credit score and history. This will determine your chances of being approved and also the mortgage terms. 

The borrower will also look into your income and assets. A bank will be interested in knowing that you are able to pay the monthly repayments. 

hands exchanging money

Hard Money Loans 

If you are looking for a short-term loan for your rental property investment, we would recommend that you consider a hard money loan. It is easier to qualify than a conventional bank loan but the lender will still look into your credit, income, and history. 

Considering it is a short-term loan, the nature of the investment must also be short. Hard money loans are ideal for fixing and flipping investments as opposed to purchasing and leasing or purchasing vacant land and developing. 

The biggest disadvantage of the hard money loan is the interest accrued. The lender will be taking on quite a big risk by giving you a hard money loan since the qualifications are less stringent. This is reflected in the mortgage terms. In addition, the loan term is typically less than a year. 

Private Loans 

These are loans from one person to another. A significant percentage of private loans originate from a family member or a family friend. 

You can also consider visiting property networking events. Here, you will find property owners and investors who are looking for their next good investment. 

As the name suggests, private loans are between two individuals. The loan terms will vary significantly from one person to another. You will be required to sign a contract of sorts that will bind you to the lending terms. 

Typical to a normal mortgage loan, the borrower will reserve the right to foreclose the property once the borrower defaults on the payments. Therefore, it might be ideal for you to assess your relationship with the lender before getting into such a relationship. 

people shaking hands

Home Equity Loans 

You can tap into the equity of your primary residence through a home equity line of credit, home equity loan or cash-out refinance. Each method stated has its own advantages or disadvantages when it comes to loan terms. 

Tips to Make Your Finance Journey Easier

In most cases, the cash or savings in your bank will not be enough to cover the purchase of the property. You will need to rely on an external mortgage provider. In that case, you should follow the tips from our experienced team to make your property investment finance journey a bit easier: 

  • Make a sizable down payment. The down payment for an investment property may vary from 20 to 30% depending on the lender. However, the larger the down payment, the better the terms that you will receive since you have reduced the risk to the bank. 

  • A ‘strong’ borrower. From the various finance options above, you can appreciate the need to have a strong credit score. Even in a private loan, the lender may wish to assess your score and your ability to pay the loan on time. Pay off your debts on time to boost your score prior to taking a loan. 

person counting money

  • Rely on a local bank. Should you be only borrowing a small amount, we would recommend that you rely on a local bank. National financiers tend to have stringent conditions. However, a local financial institution is friendlier in its terms and conditions. 

  • Owner financing. This is another option that most potential buyers don’t consider. It is a viable option that may work to both your and the seller’s advantage. 

Bottom Line

As a potential property investor, there are various options that are available for you to get financing. However, selecting and financing the property is only the start of the process. You also have to look at the management of the property. 

Management looks into overseeing and handling the needs of the property and also those of your tenants. It requires that you take on a hands-on approach, investing your time and money. 

Should you lack the experience or the expertise, consider outsourcing to a property management company. 

SGI Property Management is the top service provider in Dallas and the surrounding neighborhoods. Our experienced and professional team offers customized management solutions to townhouses, single-family residences, and multi-family properties. 

Contact us today and have a lengthy discussion with our professional property managers.