5 Ways to Successfully Finance a Rental Property
Fortunately, you actually have a number of options from which to choose.
How to finance a rental property best will most likely depend on your unique situation.
Below are the five most common options, but you may find that a combination of them actually works best for your specific needs.
1. Save Until You Can Make a Sizable Down Payment
No one would blame you for being excited about the idea of purchasing an investment property, but you also want to be careful not to rush into things.
If you eventually decide to create a portfolio of multiple properties, it should become much easier to secure financing as you go on (at least to a certain extent – more on that later).
However, when you’re just getting started, it’s important to be patient.
This doesn’t just refer to picking that initial house, but how you’ll pay for it, too. One of the easiest ways to finance a rental property is by simply taking enough time so you can save up to make a significant down payment.
You’ll still need to make your monthly mortgage payments, of course, but remember that we’re talking about a rental property.
The real challenge is simply securing financing.
Once the property is yours and you have your tenant, they’ll take care of those mortgage payments.
2. Work on Earning an Impressive Credit Score
Another essential step you should take before trying to finance a rental property is to pull your credit report. Any lender is going to check your credit history anyway, so you might as well do it yourself. This way, you can work on improving your credit score before actually requesting a mortgage.
Even if you already think your score is respectable, it’s worth working on it. For example, just moving your score from 720 to 760 could drop your APR by .2%, which might only save you a few hundred dollars a year, but that’s close to $10,000 in interest for the life of the loan.
3. Don’t Rush to the Big Banks
Despite what many people think, the big national banks aren’t necessarily the best source for mortgages.
For one thing, they focus almost exclusively on people who want mortgages for their primary residences, not investors. Their entire business model and mortgage options reflect this.
Secondly, they can generally get away with charging more because, as a household name, they don’t have to worry as much about competition. They know people will simply come to them without considering all of their other options.
So, while it’s worth checking with the big banks to see what kinds of mortgages they can offer, they’re not your only option to finance a rental property. Look to smaller neighborhood banks and online lenders, as well.
4. Request Owner Financing
It wasn’t so long ago that requesting owner financing would make a seller suspicious. This was back when anyone could qualify for a mortgage, though. Obviously, that’s no longer the case. Nowadays, with credit being so tight, owner financing is much more common.
Seller financing is exactly what it sounds like. The seller actually lends you money to buy their house using a promissory note to lock in terms just like a traditional mortgage would.
This can be a win-win for both parties. You get a better interest rate on the funds required to finance your rental property and the seller gets the accrued interest plus the price of their home.
Even if a seller isn’t interested in financing the entire purchase, they may still be interested in offering up some of the amount required.
5. Do a Cash-Out Refinance
Assuming you already have a mortgage, you can use a cash-out refinance to help secure another. A cash-out refinance will replace your current mortgage with a new loan for more than what you currently owe on your home.
Many homeowners use this option when they want to pay for renovations and improvements or even to consolidate their existing debts. However, a lot of investors use cash-out refinancing to make a down payment on a rental property.
As opposed to paying for home improvements or consolidating debt, using a cash-out refinance for a down payment on an investment property carries far less risk. Once again, as soon as you find a tenant, you’ll have the money to cover your increased payments on the new mortgage.
How to Finance a Rental Property When You Already Have a Full Portfolio
If you already have a portfolio full of homes, the above advice about how to finance a rental property may help a little, but you’re probably still facing a major challenge: traditional lenders want nothing to do with you.
Even if you have a pristine history of paying back your loans and plenty of collateral, investors like you just aren’t a big part of their business plan, so they most likely won’t go out of their way to accommodate your unique needs.
That’s where Rental Home Financing can help. Unlike the big banks and other traditional lenders, our business plan was completely designed around veteran investors who already own multiple homes and need financing to add more.
Begin the investment property application process today and we’ll let you know if you qualify ASAP, so you can quickly take the next steps toward improving your portfolio.