The single most reason that barricades potential real estate investors from entering the lucrative arena of owning rental properties is funding. Finding different means of obtaining funds to pay closing costs, putting money down on loans, and minor repairs if needed upon purchase is not an easy task unless you are already wealthy. Getting the money that you need to get started isn’t necessarily easy, but below are a few methods that I personally found to work along with a few that I have heard work well but not yet tried.
Methods for Funding Rental Properties
1.) Good Credit – I mention this method first because this can often be more of a hurdle than a benefit. If your credit is good (700s or so) then you have already got an advantage over the rest of the crowd. Good credit ensures that you can get the best interest rates on the market (for investment properties) and easily obtain loans for thousands of dollars.
2.) No-down payment – This method is a very real method, but often comes with some prerequisites. First, to get a no-money down loan you often have to visit a mortgage broker. This isn’t a bad thing, except you are certain to pay higher interest rates than if
using a traditional bank. If you’ve never purchased a home before, including one for personal use, you may fall into the category of a first-time buyer. This enables you to buy with no-money down and get out of paying PMI (private mortgage insurance). Check your local banking system for more information about that. Lastly, you may be able to get the owner of the property to sell you it for no money down.
I personally have bought three properties using only 5% down with the option of 0% down using a mortgage broker. It has worked great, but now I find that that method is getting harder to use. Interest rates are rising rapidly, meaning that I must now find homes that are extremely cheap relative to monthly rent because interest rates are eating up my profit.
3.) The old “second mortgage trick.” With the entire loan equaling 100%, take out a 30yr fixed loan for 80% of the total value. Next, take out a 15% down payment at 15 years fixed to cover 15% of the 20% that is going to be needed as a down payment. Lastly, you must get 5% of the second mortgage. This is great because it leaves you with only needing 5% of the property value and it also gets you out of paying PMI while giving you a tax-deductible second mortgage. PMI is NOT tax deductible (This method also works with a 20% second mortgage, giving you a no-money down deal).
You will notice above that I use fixed rates for everything. Interest rates are rapidly rising in the United States, and I would not encourage any real estate investor specializing in long-term rental properties to use adjustable interest rate loans. They quickly form alligators, or loans that get larger in size every year even though you pay the entire monthly payment every month. This is because the interest rate rises yet you continue to pay the minimum interest payment. Your equity quickly disappears.