There are dozens of ways seasoned investors finance their real estate deals, each with its upsides and downsides. But let’s focus here on investment financing methods beginner real estate investors prefer.
What is financing in real estate?
Financing means to provide funding for investments, purchases, or business activities. In the world of real estate, financing refers to the method you use to get funding for your investment property.
How do you finance your investment property?
By and large, the most popular way new real estate investors finance their investment properties is by getting a conventional mortgage.
The conventional mortgage
It’s a familiar approach to most since you need a mortgage to buy a property to live in. To add, they boost their popularity by boasting the lowest interest rates among other loans you can get to finance real estate investments.
The catch to getting a conventional mortgage to finance a real estate investment is the down payment of 20 percent or more. Some new investors find paying 20 percent tough, especially if they’re hardworking low- to middle-class homeowners already paying off their own mortgages.
The upside to getting a conventional mortgage for an investment property is that once you put down your 20 percent and find tenants, the property will pay its own mortgage.
All cash
If you have the money, far and away the fastest and easiest way to finance an investment property is with 100 percent of your own cash.
Behind conventional mortgages, all-cash funding is the preferred financing method; in fact, 24% of American investors use all cash to finance their investment-property deals.
All you need to do is deliver a bank cashier’s check, or other form of certified funds, to the title company, and your job is mostly done. The title company writes its check to the seller, and the property is yours. Fast, easy, and secure.
Hard money and private money
With hard money, you borrow from a private business. Financing real estate investments with hard money is attractive to new investors partly because it can fund deals quickly, and lenders don’t need income verification or credit references from borrowers.
Hard money loans have a few notable drawbacks, though. Term lengths are shorter (usually 6 to 36 months), interest rates are higher (usually 8 to 15%), and loan fees are higher.
With private money, you borrow from nonprofessional lenders, such as an individual. In most cases, you’ll have a personal relationship with private money lenders, and loan contracts will be much more flexible and present fewer fees.
They will lend you the cash you need to finance your real estate investment at a specified interest rate. Private money loans are secured, usually with a promissory note or the property mortgage.
Federal Housing Administration (FHA) loans
If you intend to live in the investment property you buy — for example, in one unit of a triplex — you can take out an FHA loan, which is a type of mortgage you can get from an FHA-approved lender.
The down payment for an FHA loan is incredibly low, just 3.5%, making this mortgage popular for new real estate investors.
However, you’ll need to make a private mortgage insurance payment on top of your mortgage payment each month, since the down payment is under 20%. And you must use an FHA loan to purchase property you’ll live in.
How do you buy an investment property with no money down?
If you have a solid lending history and credit score, you can negotiate with some lenders to include your down payment in the loan, covering the entire purchase price of the property. But expect your interest rate and monthly payments to be much higher.
You can also find an investment partner, someone who’ll cover the down payment in exchange for a percentage of your resale profits on the property.
The bottom line
Financing your real estate investment is the start of an exciting venture. Hopefully, now you’ll know enough about financing basics to get started. If you’re eager to learn more, head over to our guide on investing in real estate.
