Real Estate Investment: How to Finance You First Rental Property

real estate

Real estate is still an attractive investment choice in 2020. Compared to stocks, real estate can offer lower risks, better returns, and greater diversification.

One of the most popular ways of investing in real estate is by managing a rental property. But financing a rental property is more complicated than it looks. You have to consider the costs of repairs and upkeep, which add to your monthly mortgage payments. If you’re buying a fixer-upper, you might also need to do some renovations to make the place livable before you can rent it out.

If you’re planning to invest in your first rental property, here are some financing options to consider.

1. Buy as an owner-occupant

One of the easiest ways to enter real estate investing is to purchase your first rental property as a primary residence. You then live in the property until you’re ready to rent it out.

Banks typically require higher down payments for investor loans. But if you buy as an owner-occupant, you can take advantage of first-time home buyer loans, which give you smaller down payments and lower credit score requirements. In most cases, owner-occupants can qualify for lower interest rates, too.

Make sure you learn the rules surrounding owner-occupied properties before proceeding with your purchase. Banks and lenders will require you to live in the house for a specific period, usually a year, before you can sell it or rent it out.

2. Find a portfolio lender

Portfolio loans are a good option if you don’t qualify for a conventional mortgage. These loans offer more flexibility, ideal for borrowers with low credit scores and those who want flexible mortgage terms.

You’ll also find it easier to qualify for a loan with a portfolio lender than a traditional lender. The former doesn’t have to meet underwriting guidelines, making it easier for you to get approved.

Portfolio loans are investor-friendly as well. They don’t require the property to be in a certain condition, which is advantageous for investors interested in doing a house flip.

However, portfolio lenders often impose high interest rates and prepayment fees because they assume more risk than traditional lenders.

3. Look into distressed sales

Buying a new house

Another strategy is to look for distressed sales or foreclosed homes. The owners of these properties are often rushing to sell, so they offer the house at a lower price than the average market value. You can try to negotiate the price down further if the seller is desperate to dispose of the property.

Some benefits of buying distressed properties are the quick transfer of titles and a legitimate purchasing process. You’re acquiring the asset from a bank or the government, so you know the transaction is clean. You also have full transparency when it comes to the condition and legal issues of the property.

Acquiring distressed sales also have its drawbacks, however. Foreclosed properties are often sold as-is. This means you’re buying the house along with its problems.

4. Consider seller financing

Finally, you can try buying a property with owner financing if the seller owns the asset free and clear. In this case, the seller becomes the lender. They’ll give you the title, although they’re holding a note and security deed to the house.

You’ll make monthly payments, usually with interest, until you pay back the entire loan. If you default on your payments, the owner could foreclose on you. Once your financial situation improves, you can refinance with a traditional lender.

Before you start investing in real estate, evaluate your financial capabilities first. List all your funding options and cross out the ones that don’t match your current financial standing. Then start looking for potential properties that you can buy with your viable funding options.

Don’t forget that investing in real estate requires extensive knowledge of the housing market, construction, and property management. Do your research before entering real estate investing.

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