Are you thinking about getting into the investment property business? It can be super profitable and filled with challenges that’ll keep you on your toes all day, every day. Of course, you’ll need to secure some financing if you’re ready to take on a mortgage that enables you to buy your first (or next) rental property. Fortunately, there are plenty of options beyond the conventional loan that might pop into your head at first thought. Here’s a quick rundown of a few popular options.
1. Private Lending
Private lenders are people or companies who can lend money to you, but they’re not tied to any bank or credit union. With this type of lender, the loans typically happen reasonably quickly because the application process is informal. Some private lenders may be more willing to work with you if you have poor credit than would a traditional financial institution. You’ll be required to adhere to the terms of your lender’s loan, just as you would with a bank or credit union, and you’ll still be paying interest because that’s how your investor makes money.
The biggest attraction to this type of loan is typically the expediency in which the loan transaction often occurs. Bear in mind, however, that private lenders often want their money back much quicker than a bank would, so you probably won’t be able to get a 30-year mortgage from a private investor. These types of loans are best if you plan to pay your investors back in three to five years.
2. Hard Money Lending
Hard money loans are also secured by private investors (either individuals or groups) who agree to give you the money needed for a very short term—usually around 12 months but sometimes up to five years. With these loans, you’ll be required to make a balloon payment at the end of the term, which will pay back the principal plus the accrued interest. The focus on this type of loan is the value of the property. If you’ve had a recent foreclosure or short sale, you might have problems getting a loan with a traditional financial institution. However, hard money lenders might still be willing to contribute to your investment.
3. Debt Crowdfunding
Debt crowdfunding (also known as peer-to-peer lending) occurs when a lender essentially acts as a traditional lender, providing you with the necessary funds you need at an agreed-upon interest rate. The idea is similar to those of Kickstarter or GoFundMe. But the difference is, with those sites, people contribute without expecting anything in return. Real estate investors, however, expect to earn interest on their contributions. Before they give you money, they might want to know:
- How much the property is worth.
- In what neighborhood you’re purchasing the property.
- If you’re planning to hire a professional property management company to handle cleaning, maintenance issues, advertising, tenant screening, and potential evictions.
- Whether you plan to live on-site (in a multi-family dwelling), or if this will be an investment property in which you do not live.
The rules may vary depending on your investor, but the interest rate is typically lower than what a bank would charge, and these loans are often easier to obtain.
Before you sign on the dotted line, make sure you’ve assessed all possible options so you can ensure that you’re getting the best loan possible for your unique situation. If you’re unsure, or if you have questions, consider talking to a mortgage broker who’s experienced with a variety of loan types. These real estate pros know how to navigate all sorts of loans.