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Different Types of Financing for Your Investment Property

Interior view of home under construction.

As a property investor, how many times have you been forced to walk away from a good deal because you could not get financing for the property? Perhaps the bank didn’t give you the money you requested because the loan officers deemed your investment too risky.

Access to financing is a significant hurdle that all property investors must scale repeatedly to get their investments off the ground. Lenders intentionally make obtaining an investment property loan more difficult because of the associated risks.

But seasoned investors who have been in the property investment scene for a long time know how to navigate these obstacles. Abilene Leasing & Property Management explains they use a sophisticated investment strategy that includes numerous investment financing options instead of the one option most new investors use.

By adopting different financing options, advanced investors improve their rate of success. Depending on the type of investment, they can use a specific financing option or combinations of other financing options to ensure they get the most out of every opportunity.

You can do the same as an investor trying to access funding for your next investment property. This post discusses the different financing options for investment properties with their pros and cons to help you solve this problem of access to funding.

Different types of investment property financing and when to use each one

1. Conventional mortgage loans mortgage application with house key and pen

Private entities like banks or mortgage lenders make these loans. They are subject to regulations made by Fannie Mae or Freddie Mac. The federal government does not back conventional loans.

To access this kind of loan, you need a down payment of at least 20% of the property’s purchase price. Also, you must have a minimum credit score of 620 or 740 if you want a reasonable interest rate. Banks will require you to have enough monthly income to sustain the payments on two mortgages.

Conventional loans are the best option if you can meet all the requirements. They are relatively cheaper than the other options. However, banks will typically not give you money to flip houses; they view house-flipping as a risky investment strategy.

2. Hard money loans

Hard money loans are offered by professional loan companies and individuals whom the federal government and Fannie Mae or Freddie Mac do not regulate. The primary advantage of using a

hard money loan is the process is faster, and they do not look at the investor’s credit score.

The loan is issued on the value of the income property the investor wants to buy. Like a conventional loan, some necessary documentation comes with applying for a hard money loan. The loans have a higher interest rate, which can be 10% more than conventional loans.

The most important thing to know about hard money loans is they are only suitable for short-term borrowing up to 36 months. Because of the short–term nature of the loan and the high interest rate, hard money loans are best used when flipping houses.

3. Private money loans

contract deal

Private money lenders are individuals with a lot of idle cash who want a good return on their money. They don’t opera

te within a professional or organizational setting like hard money lenders. They can be friends, family, co-workers, or neighbors.

These loans come with fewer formalities but often require a closer relationship between the investor and the lender. The loan conditions are also more flexible, with lower interest rates and a negotiable loan duration.

Private money loans are secured by a promissory note or a mortgage on the investment property. This is a good option if a conventional lender has rejected you.

4. Home equity loans

The home equity loan is an excellent option for investors with several built-up equity in their primary home. For such homeowners, lenders will let them borrow money against the equity in their home. The money from the loan can be used to finance an investment property.

A home equity loan is based on the difference between the current value of the home and the homeowner’s equity in it. Before the bank approves an application for a home equity loan, they will do an appraisal of the house and run a credit check.

Home equity loans let you avoid the hassle of raising money for the down payment on an income property. However, if you repay the loan, the bank will repossess the investment property and retain all the money earned on your first mortgage.

To sum up, there are other ways to finance an investment property apart from these four options. Knowing about these options, plus when and how to use them, will help you stay ahead of whatever obstacles you may meet on your investment journey.

Would you like to learn how to use diverse financing options to build a bulletproof real estate investment strategy?

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