Financing Basics for First-Time Rental Property Owners

Real Estate Investment is a profitable and risky venture and has produced many wealthy personalities; therefore, it’s not wrong to assume that purchasing real estate to earn an income is a good idea. It’s best to know the ropes first as you need to have a wide range of skills to become a landlord. 

There are times that one of the things that prevent you from taking that leap is how you will be able to finance your properties, but with proper knowledge about the basics and how the business goes, you can go a long way with this kind of venture. Here are something that can help you if you are sure that you want to invest in rental properties:

Rental Property Basics: Pros And Cons

Rental properties are leased to a tenant over a set period of time. It can be leased short terms like vacation rental properties, or long term that go up to six months or over a year. There are different kinds of rental properties, and those are:

  • Residential: This is one of the ways for investors to gain additional income as they collect monthly rents from tenants who occupy it. Some of the examples of this kind of property can be a condominium, apartments, or any types of residential houses.
  • Commercial: Other investors buy commercial properties that are used exclusively for business purposes. A high risk-high return because improvements and maintenance to these properties can be more expensive than residential properties, but these costs can be paid back by more significant returns as these properties are usually priced higher than residential ones. 
  • Mixed-Use: This property is designed for both commercial and residential purposes. For instance, a building may have commercial space on the ground floor, like a retail store, bar, or restaurant, then when you go up in the building, there will be residential units.

The main advantage of rental property is that it will provide you steady cash flow. The monthly revenue from tenants can help you pay the mortgage, maintenance, and repair cost that your property needs. 

However, there are also disadvantages for rental property owners like property management, delayed payment from tenants, unexpected damages from calamities and accidents. These can compromise your income, which can lead to financial losses.

How to Finance Your First Rental Property

In any business venture, financing may be a big challenge that hinders you from investing. Here are some financing basics and options you can do to get you started in your real estate venture:

  • Conventional Lenders: Conventional lenders have strict loan program guidelines, but the main advantages of conventional loans are usually the loans that can be offered to landlords and first-time real estate investors. However, getting a loan from them may take time as they have strict credit and income requirements. Additional documents are also one of the requirements if you decide to choose conventional lending.

  • Online Lenders: These lenders are increasingly becoming a mainstream, go-to funding option for landlords trying to acquire loans and. Unlike conventional lenders, online lenders are far more flexible than the rigid traditional lending programs. You can get a loan faster even with fewer documents in hand, and they don’t check your credit scores and income statements that much. However, the interest in some will be at least 10 percent that can go up to 25 percent, which for some, will be considered as somewhat expensive compared to conventional lenders and banks.

  • Hard Money Lenders: These are money lenders who finance renovations or when someone develops a property. To be able to get a loan from them, they will be using the value of the property after it has been renovated or developed. This is also known as ARV or after repair value. It’s convenient as they usually agree on flexible terms, but the repayment period might be short.

  • Local Banks: The loans you may get from a local bank are not cheap but not as expensive as online and hard money lenders. Though, they will check your credit and income statements before they lend you any money. One drawback of getting funds from a local back is that they may ask for your other valuable properties as collateral.

Takeaways

Finding the best financing option for your first rental property investment solely relies on your current situation. Most of the time, your credit and income statement play a significant role in how much money you can get, but there are other options that won’t be tedious and won’t require you such documents to start your real estate venture.

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