Financing options for rental investment properties

by Ryan Rose21 Jun 2019

Financing investment properties can be tricky. LendingOne offers several different types of loans investors are using that help make these types of investments successful.

Conventional mortgage loans are primarily through banks, credit unions, and mortgage brokers. These loans use credit history and credit scores to assess whether or not a loan will be granted. These loans also have the ability to cover a borrower’s current mortgage (if they have one). Many of these require sufficient cash to cover payments on both loans for half a year while income from potential rent is not considered. On average, these require a down payment of 30% for rental investment properties.

Borrowing against home equity is another option suggested by LendingOne. This type of loan occurs in three ways. A home equity loan allows you to borrow up to 80% of the equity in your home at its current market value with monthly payments of interest and principle. A home equity line of credit or a HELOC loan is a line of credit against your current equity and usually requires interest-only monthly payments. A cash-out refinance loan uses the equity you’ve built as a foundation while you pay off your current mortgage on your primary property and reapply for a new mortgage while the difference is paid in cash.

Another option is using “hard money” or an asset-based financing loan. The value of the property is considered rather than personal income and credit. However, this type of loan does generally feature high interest rates. Hard money is used for short-term loans, not buy-and-hold investments, but helps to bridge the gap to a long-term loan.

Private money offers another avenue. These loans are primarily relationship-based and require a strong business case for investors. The lender could lend cash at a pre-determined interest rate and for a fixed term. Many times a borrowers’ mortgage is used as a promissory note to secure the investment for the lender.

Finally, the owner financing option is where the property’s owner finances the sale of the investment property. This is only for properties that are owned outright and aren’t still partially owned by a bank or another lender. Borrowers using this option agree on a price and make payments to the property’s owner instead of a bank or other type of lender.

Financing is important. Take the time to consider all the options. By choosing the best financing option, investors will be able to deliver funds needed to make investments successful – without binding you to unrealistic financial obligations.