Real estate investors must find creative ways to finance investment properties. Most young investors seek to buy a house or a property with little or no money down. Financing a rental property with no cash down on your behalf can be done through many methods. However, determining the best financing plan for your investment is where the hard work lies. This problem arises typically when real estate investors try to invest in rental properties, but most property loans require a down payment of 20% on each property. This will slow down your growth as a real estate investor.
There are multiple ways to consider when trying to buy a house with no money down. The following are options for you to consider when financing a rental property:
Financing a Rental Property Through Seller-financing
This method requires the seller of the property to finance it, meaning that there will be no down payment on the property. This requires a motivated seller willing to offer help in financing the property. This is a great option to consider if the buyer doesn’t fit the criteria to secure a loan.
Seller financing is a unique strategy as the seller is the one who lends the money to the buyer to secure the purchase. This method works great as both the seller and the buyer can determine the interest rates, monthly payments, and any other conditions as they see best fit.
Seller financing is a method mainly used for short term financing usually between 3-5 years and mainly requires a payment at the end of the contract.
Related: 4 Investment Property Financing Methods
Financing a Rental Property as a Joint Venture
A joint venture is a business arrangement between two parties or more, to gather their resources to accomplish a certain profit, and in this case, to buy rental properties. A joint venture works great for young investors as all investing parties will share profits and losses. A single asset joint venture will require small payments from both parties to cover a down payment while covering the remainder of the property value through a bank loan.
In a joint venture, partners will own proportions of the property that match the down payments and the loan payment plan they agreed upon. This is a very common method for financing rental properties that most successful real estate investors use to grow their investment portfolio.
When financing a rental property as a joint venture, it is highly recommended for the real estate investors to conduct a full investment property analysis. This ensures the profitability of the venture as both real estate investors wish to obtain a return on investment. Mashvisor’s rental property calculator clarifies all that real estate investors need to know about their property’s value and expected cash flow in the long run. Real estate investors are recommended to invest in income properties that ensure a positive cash flow and a high rental income.
Financing a Rental Property Through a Private Loan
Private money lenders offer loans usually secured by a property. There are private lending companies that offer such services and only take up to fifteen days to get funded. A private lender can also be a personal acquaintance or a friend.
Hard money lenders are the most common party to secure a private loan; they represent firms that are established in the market and have consistent terms, fees, and interest rates.
Private money lenders offer their services mainly for short term loans, usually for two to three years which works great for house flips.
Related: Where Can You Find the Best Financing for Flipping Houses?
Financing a Rental Property Through HELOC
A home equity line of credit entails using the equity of your residential property as collateral for credit. It is a valid method to use when financing a rental property as the credit can be used for a down payment.
You can calculate your property’s equity by calculating your property’s current value and the amount owed. The difference between the two figures is your property’s equity. Therefore, it is connected to your property’s value fluctuations.
Related: Should You Remortgage to Buy a Second Home?
Real Estate Wholesaling
Real estate wholesaling involves finding a property at a discounted price; the wholesaler contracts the property and then finds a proper buyer for it. This method works wonders as the wholesaler will benefit through a pre-set percentage usually 5-10%. This method is a great example of how to make money in real estate for a minimal investment; all it requires is a highly motivated wholesaler.
Real estate wholesaling may not be a typical type of financing, but for the little time invested, it is worth the effort. A wholesaler will advertise and manage the property’s sale for a fee which can be used to secure a down payment when buying an investment property. Most successful real estate investors consider this method to be a stepping stone for them to raise down payments with minimal effort.
Financing a Rental Property Through an Option to Purchase
This method allows investors to buy a property without legally owning it. The real estate investor signs a contract with the homeowner to buy at a predetermined price, allowing the real estate investor to rent the property until he/she can purchase the property for the pre-set price.
The option to buy lasts for a specific number of years, in which the seller can practice the option to buy the property. The biggest advantage of a lease option is the price lock-in as no one can buy the property unless the buyer defaults.
Related: Lease to Own Option and Its Pros and Cons for Buyers and Sellers
Financing a rental property with the right method is a key ingredient to the success of a business. Becoming a real estate investor requires factoring in all the details of the purchase to ensure a positive cash flow and a high return on investment. The previous methods may not work for all types of properties but can help a new investor find a pathway into the real estate investment world. Buying a house or a property with no down payment limits the option of credit but most successful real estate investors would conduct a thorough research to find the most appropriate way when financing an investment property.
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