How to Finance a Rental Property – Part 2

How to Finance a Rental Property (Part 2)

Click Here To Read Part 1

Have The Seller Finance The Property

It’s one of my favorite ways to buy properties since it requires no bank qualifying and the timeline to purchase the house is much shorter.  By having the seller finance the house and be the bank you can avoid the lengthy process of loan origination and qualification. Plus, the loan does not show up on your credit which allows you to buy another investment property using bank financing. Why would anyone seller finance their property? Well, there are many benefits to the seller like reduced tax burden, steady income stream, selling the house faster, better returns than bank CDs (certificate of deposit) and possibly getting a higher price.

Buy With Lease Option and Refinance Later

Another strategy is to buy the investment property on a lease option and later convert that lease option to a purchase by getting bank financing when your credit has improved, and you have enough saved for your down payment and closing cost. You would want to get a long-term lease option to give you enough time to improve your credit. 

Invest Together with Someone Else as Co-borrowers

If you have some money but not enough money for a down payment and closing costs and you want to buy your first rental property, you could find another person with similar interest that has the funds but no time to find the property or manage the property.  This scenario could be a win–win scenario for both parties.  You can go in on the investment together by acting as co-borrowers. You share responsibility for monthly payments on the house, and you can also share profits that come from rent payments or equity buildup.

Private or Hard Money Loan

Many people that renovate houses (i.e. fix and flip) use private lenders or hard money lenders to help them scale their business.  They understand that the cost of capital is small compared to the large profits since these are short term loans and the interest amount does not significantly impact their profits.  

Hard money loans allow investors to secure capital quickly for short terms and the loans are based on the value of the property and not so much on the individual’s credit.  The underwriting process is typically less strict than with a traditional mortgage loan and is many times called asset based lending since the loan amount is based on the value of the property.

If you find a deal on a fixer upper, and you qualify for a hard money lender’s loan-to-value (LTV) guidelines, you may be able purchase with little or no money down.