Thursday, 29 November 2018 00:00

3 Investor Financing Options for Rental Properties

Three investor Financing OpSeasoned real estate investors will tell you that it takes a lot of work to build a successful portfolio.

As the old saying goes, real estate is all about, “location, location, location.”

Of course, the actual homes themselves are an equally important factor that must be considered. Even when the investor intends to flip the property, they must first think through all the work and money involved before deciding it will be worth it to proceed.

Then there’s one of the most overlooked factors: investor financing.

While money is always a part of the equation, how that money is acquired doesn’t always get its due.

 

3 Investor Financing Options for Building Your Rental Property Portfolio

Imagine one financing option costs you a penny for every dollar you borrow and that another costs you 50 cents.

Or, say that one option will give you all the money you need outright, whereas another will come with a long list of restrictions about how it can be acquired and spent.

This is why the source of your investor financing matters so much. It’s not just about the total sum of money you receive. It’s also about the terms involved and how that will affect what you’re able to do with it.

With that in mind, here are the three best financing options for real estate investors.

1. Cash

Many people are surprised to find out that cash isn’t only a common version of investor financing but is actually one of the most common versions. In fact, close to 25% of monthly residential sales are often completed with nothing but cash.

While the promise of paying for a house outright and not having to worry about interest may seem attractive, there are two major problems with this approach.

The first is that it’s just not realistic for most people. Even if you’re buying a dilapidated home to fix up, you’ll need at least tens of thousands of dollars on hand just to make the purchase.

Second, many investors would argue that interest is a small price to pay (literally) for the leverage a loan offers. Instead of paying, say, $150,000 all at once, why not spend just $30,000 and use the rest to buy more homes, leading to much greater cashflow in the near future?

2. Conventional Mortgages

This is why so many investors choose conventional mortgages. Another reason is simply because they’re so commonplace. Walk into almost any traditional lender and you won’t lack for conventional mortgages. It’s one of their biggest sources of revenue.

Still, they’re far from an ideal source of investor financing. While they generally offer low interest rates and long durations (at least 30 years is common), they aren’t especially friendly to investors.

For one thing, if you already own three or more properties, applying for another mortgage is going to be a headache.

Conventional lenders generally don’t understand real estate investors, either. For example, if you’re buying a home for the sake of flipping it in the near future, a bank may still require a number of repairs be made before they give you the money. This means carrying out repairs on a home you don’t actually own or even plan on owning for long – not a great arrangement.

3. Blanket Loans

Finally, among investors who are looking to grow their portfolios, blanket loans have become the most popular option.

A blanket loan is a lot like a conventional mortgage except that it covers two or more properties. So, instead of taking out three different loans, an investor will take out one loan for three homes.

Unlike cash, they provide the added benefit of leverage, just like any loan.

However, unlike a conventional mortgage, they generally provide a lot more leverage. A single loan for $450,000 inspires much more confidence in lenders than 3 loans each for $150,000. As such, in the future, the investor who opted for a blanket loan will have a much easier time borrowing a larger sum.

Better still, with just one loan – as opposed to several – there are fewer costs involved, an attractive benefit for investors who would otherwise suffer great overhead while growing their portfolios.

Furthermore, as blanket loans are solely for buying properties, borrowers never run into problems with traditional lenders who don’t understand the nuances of investor financing.

Need Investor Financing Right Away?

Finally, one more reason blanket loans have become such a popular form of investor financing is because their application process is so simple. You can literally begin it right now.

If you’re interested in a blanket loan to build your portfolio, start the application process and we’ll get the process moving right away, ensuring a quick acquisition of your new properties.

 

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