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Everything You Need to Know About Rental Property Financing

Landlords and rental property owners know the benefits of earning steady cash flow from successful real estate. However, when it comes to financing a rental property, things may be a bit hectic or stressful. You may have to jump through hoops to find an alternative way to finance your property.

So, is it possible for you to successfully finance a rental property? Keep reading to learn the best ways to finance a rental property.

When it comes down to it, investing is not the easiest thing to do. It takes patience, effort, and most of the time, quite a bit of money. You typically need to be approved for a home loan, which may be difficult if you don’t have a credit score that is over 600, at least a 10% down payment, and in some cases, you may need to show proof of substantial savings. 

With all of these things to keep in mind, it leaves landlords wondering what the best rental financing option might be, or if it’s a possibility at all. Luckily, there are creative and sustainable ways to finance a rental property, even if it means taking the non-traditional route. 

Be Aware of Your Finances

Both new and experienced real estate investors know that the end goal is always positive cash flow. But to do this successfully, there are a number of things to first consider when it comes to all the money that first goes into real estate investments. 

Before considering financing a new rental property, take into consideration the money that you will be continuously putting into your property, or properties, if you have multiple. 

Just a few of the expenses that you’ll run into as a property owner include:

  • Taxes
  • Mortgage 
  • Maintenance, repairs, and renovations
  • Short-term or long-term vacancies 
  • Property management fees 

If you want to avoid going over your estimated budget, you must take these points into consideration when investing in a new rental property. If done efficiently, rental properties can provide consistent cash flow. 

5 Alternative Rental Property Financing Ideas

When it comes to investing in real estate or financing a rental property and becoming a landlord, it’s vital to do some simple research. Knowing your personal finances and understanding all of your finance options when it comes to securing real estate is the first step in successfully owning a rental property and earning consistent cash flow from your property’s rental income. 

Luckily, there are some easy ways to quickly secure a rental property through non-traditional methods that are used by many landlords today. However, when you go the non-traditional route, you are inevitably taking a few risks. 

That said, here are some of the most common financing options that property owners opt for:

  • Use home equity loans
  • Find a business partner
  • Use cash
  • Use a private money lender
  • Use cash-out financing

With all of these being decent financing options, each investing situation looks different. Read on to learn more about using home equity loans, business partners, cash private money lenders, or a conventional mortgage to finance your rental property. 

Use Current Home Equity Loans

One of the most dreadful parts of any real estate transaction is the typical large down payment that’s needed. Luckily, if you are already an investor, you can utilize equity in one of your existing homes as a way to finance another investment. 

Similar to a small mortgage, an equity loan utilizes one of your existing homes to secure a new property while making monthly payments over a 15 to 20-year period. This is a quick and easy way to purchase a second property and a good way to get your rental business started if you are a beginner.

Home equity loans utilize the fair market value of your home, minus the balance of any existing mortgage or other costs held against it. For example, if the home is worth $250,000 and you owe $150,000, then you may be able to use $100,000 as equity to finance your next property.

Find A Business Partner or Partners

Another good way to finance a new rental property is to find one or more business partners to go in with. This can be great for a number of reasons, including:

  • Flexibility and less stress
  • More real estate knowledge
  • More financial backing
  • Your name doesn’t go on the mortgage

Another great reason to utilize a business partner while investing in real estate is if you’ve exceeded your loan lending limit but want to continue expanding your properties. Whether it’s a friend, family, or strictly a business partner, this could be a viable option for someone who wants to expand and purchase many properties. 

With that, it’s important to recognize the risks of partnering on a business deal like this. Make sure it’s someone that you trust and someone who will be cooperative throughout the entire process. 

Use Cash Outright

While this is one of the smartest, quickest, and most efficient ways to purchase a new property, it’s not always doable for everyone. However, if you are an experienced investor and you have the cash on hand, it’s a great way to purchase properties at more competitive price points. 

Here are some of the benefits to purchasing a property outright with cash:

  • Less risk than financing
  • Less chance the purchase will fall apart
  • More favorable to sellers
  • Avoid interest that piles up over the course of a loan
  • Increased cash flow without having to pay a mortgage

Along with any great benefits, however, come at least a few drawbacks. With financing, you have more diversification and may be subject to more tax benefits. Along with that, financing properties is a great way to build a portfolio. 

Use A Private Money Lender

When it comes to utilizing a private money lender, the main benefit for investors is speed and efficiency. This type of funding comes directly from a non-institutional lender who provides financing in exchange for an interest in the property. 

However, when it comes to using a private lender, the interest rates for this type of loan may be extremely high compared to other available loans. This has the potential to pay off, though, if the property has excellent, sustainable monthly rental income. 

Some of the most common reasons people use a private money lender are:

    • If things are moving at a fast pace – After all, time is money, and that still holds true in the world of real estate. If investors are looking to secure funds to purchase a property quickly, this may be a good and viable option. 
  • If your credit score is not that great – Although going through a private lender may cause you to pay higher interest rates, it may be a good option if your credit score is on the lower side, since they don’t have the same strict requirements that banks do. 

Use Cash-Out Refinancing

Finally, another option for investors looking to finance a rental property is using the cash-out refinancing method. With this, investors can borrow up to 80 percent of their home’s overall value. By paying off the properties existing debts, creating a new mortgage, and then giving investors the difference, cash-out refinancing is a great option for those looking for an alternative financing method. 

The downside to this method, though, is that the lender is still using your currently owned home to secure the loan. With that said, it’s essential for investors to be comfortable putting their property on the line.

Some of the most beneficial reasons investors use this financing method include:

  • Low-interest rates
  • Potentially increase ROI
  • Make upgrades that could justify rental upcharges
  • Invest in more properties and grow your portfolio

Contact Your Local Property Managers

The first step to becoming a successful rental property owner is understanding all the rules and regulations that come along with owning real estate. Along with that, it’s always beneficial to utilize the helpful resources you have around you. 

Luckily, with the help of a local property manager, some of the tasks that come with owning rental properties can be lifted from your shoulders. Some of the services that Bay Property Management Group supplies real estate owners with include:

  • Collecting rent payments
  • Maintenance of the overall property
  • Screening potential tenants
  • Targeting potential tenants
  • Knowledge of state and local property laws
  • Navigating compliance requirements
  • Financial reports

Bay Property Management Group knows all the ins and outs of rental property-owning, renting, and managing. No team works more diligently and efficiently to help you meet all your rental property requirements and your real estate financial goals. Need help with your real estate property? Contact your Philadelphia experts today. 

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