Buying a turnkey investment property with cash just isn’t an option for everyone. And that’s totally fine! While there are definitely benefits to buying a property outright with cash, there are also some advantages that come with taking out a loan, like having leverage and not tying up all your cash in one asset.
With real estate, the most common type of loan that’s used is a mortgage, which usually comes from a bank or credit union. However, this isn’t the only lending option you have when buying property. In fact, there are a number of alternatives out there, and knowing a bit about each of them will help you as you make decisions about financing your property.
One of the most commonly used loans to buy rental property is the mortgage, which comes from a bank or credit union. These loans are pretty simple in how they work: you get approved to borrow a certain amount based on your asset/debt ratio and credit score; you agree to the loan terms (interest rate, years on the note, etc.); you provide a down payment; you start paying on the loan after you close on the property. That’s it in a nutshell, but be aware that under the mortgage umbrella, there are a few other subcategories of loans. These include:
- Fixed Rate – This type of loan has an interest rate that will never change over the life of the loan, so long as you don’t refinance or do anything else to alter the loan.
- Adjustable Rate – This loan comes with a flexible interest rate that will go up or down depending on market conditions.
- Zero Down – This works how it sounds: you don’t have to make a down payment. However, good luck finding this type of loan in the post-2008 lending world. The market crash that occurred pretty much obliterated any chances of lenders taking on this kind of risk. You’re much more likely to find a loan where you can make a lower (but not zero) down payment; just expect to pay much higher interest rates.
- Balloon – Balloon mortgages are short-term loans that usually expire after 5 or 7 years. The loan payment is similar to what it would be with a 30-year note, but when the 5 or 7 years are up, the borrower must pay the balance – which can be a lot.
Home Equity Loan
Home equity loans offer another option for investors who already own their own home. With this type of loan, the equity that you have built up in your current property serves as collateral, and that is the amount that you can borrow. Some of the benefits of using a home equity loan include lower interest rates, relative ease at securing the loan, and the ability to qualify for a large loan (enough to buy an investment property or to use as a down payment for one) so long as you have sufficient equity built up.
Seller financing is pretty self-explanatory. In this scenario, the current homeowner agrees to finance the purchase, and the new buyer pays him/her directly. This can be a good option for investors who may not qualify for a mortgage or who are looking to circumvent a long closing process. From the seller’s standpoint, it can be a great way to make a bit of extra money on the sale of the home, as all interest will go to them rather than a bank or other lender.
Hard Money Loan
Hard money loans are a good choice for people who need to bypass a traditional lender for some reason. This might be because they would struggle to qualify, or because they need to act fast and don’t want to wait on lengthy approval and closing processes. Hard money loans also offer more flexibility because they come from a private lender who isn’t subject to the regulations banks face. Therefore, loans can be customized to unique situations, which can benefit both borrower and lender. Hard money loans will typically cost you more, though, and they are usually only for very short terms (i.e., less than 5 years).
If you don’t have the money to buy an investment property outright, don’t sweat it. There are a number of loan options available to you, even if you don’t have perfect credit or tens of thousands of dollars saved up. Explore your options, learn as much as you can about each, and then decide which one is right for you!