Financing Rental Properties
One of the biggest hurdles for new real estate investors is getting financing. Fortunately, there are many different ways to obtain financing. Let's cover a few common methods below.
Local Banks:Local banks and credit unions tend to be much more friendly with real estate investors than national banks. The reason a local bank might be a good option is because they like to invest within the local community. And they want your business! If you bank with a local bank, you've probably build a personal relationship with them.
Mortgage Brokers: A Mortgage Broker is an independent agent who has relationships with all types of financial institutions. They work with people with good credit, bad credit, no credit, etc. In essence, a mortgage broker is a "middle man." However, it is worth considering using a mortgage broker, if you cannot get financing with a local bank.
Hard Financing:Hard financing is when you utilize a private lender who has ample funds to lend. He or she lends you the money to purchase the property HOWEVER they typically charge higher interest fees (7-10% more than a traditional lender). They also charge loan fees (which can be 3-10 points). A point is equivalent to 1% of the loan value.
The benefits of doing this include getting the money fast, to secure the deal immediately. Also, there might not be a credit check. The disadvantages include the high rates and high loan fees, which cut into your profits. This method is ideal for "flipping properties" or if you have the intentions to "refinance" within 6 months.
Owner Financing: This is one of my favorite ways to get started in real estate investing. In this example, the owner owns the home outright. He or she agrees to sell the home to you at a set price and interest rate. They carry the financing and you make the monthly payments to them.
The benefits of doing this as an investor, is that you an secure financing without having to use a bank. You can also create terms that benefit you and the seller. I believe this is a win-win deal for most investors.
In conclusion, the four common types of financing include local banks, mortgage brokers, hard financing and owner financing. Another thing to consider is getting your personal finances in order before you attempt to get financing. At a minimum, you should have a current credit report. Make sure it is accurate.
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