How to Finance a Rental Property – Part 1

How to finance a rental property without increasing your income (Part 1)

Many people would like to get into the world of investing in real estate but have no idea on how to go about it.  Building wealth through rental real estate is still one of the best and least complicated ways to obtain true wealth that is somewhat passive.  There are several creative ways to buy an investment property that you may not be aware of that we will cover in the article.  This is part 1 of a 2-part article that will outline specific way to acquire real estate without having to dramatically increase you income.

Rent your home and buy a new residence

This is exactly what I did when I started out.  Someone approached me wanting to rent the property I lived in, and the offer was $400 above my PITI payment (which included principal, interest, taxes, and insurance) that I immediately jumped on it.  Yes, I had to find another house but when going to get another loan it was easy since now my income was greater because of the profits from the rental.  The bank typically takes around 75% of the income from the rental and adds it to your income which reduces your overall DTI ratio (debt to income ratio). 

Why not buy a rental and keep your primary residence instead?  The main reasons are that a) investment property loans usually require a larger down payment of around 20% down and b) the interest rate is generally higher that the rate on your primary residence by around 0.5%.

Use a Home Equity Line of Credit (HELOC) or Cash Out Refinance

If you have a home and have considerable equity, then you may be able to get a HELOC on your home to use to fund a down payment on a rental property.  The great thing about HELOC is that you only pay interest on the money you borrow.  Your rental income will cover your interest payment.  Now this is a short-term strategy since best to refinance in later. 

A cash out refinance lets you refinance your mortgage for a higher amount than you owe. Then, you take that extra loan amount out as a lump sum of cash.  Then you can use the money advanced to make a down payment on an investment property.  In other words, if you have enough equity in your home, you may be able to start investing in rentals with no money out of pocket. 

Buy a small 2-4 unit multifamily and live in one unit

You can buy a 2-4 unit multi-family instead of a single family and make that your home to get started and have your tenants pay for your home.  You could live in one unit and rent out the rest and offset your mortgage, so you live for free and in some cases make a small income.  As long as you live in the house, you can get FHA or VA loans and these are low or no down loans.