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Buy Income Property |
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How to Finance Your Investment Property
· Mortgage (First Mortgage) - The most common and easiest way to finance any investment property is to take out a mortgage for that property. You can get a mortgage from a bank, a mortgage broker or an online lending service. Mortgages on conforming properties (1-4 units that meet certain criteria) are available for up to 80% of the property value, so you'll need to come up with the other 20-30% from another source. · Second Mortgage - A second mortgage is any mortgage in addition to the first mortgage. Second mortgages are more difficult to get than first mortgages and they carry a higher interest rate, so they are more expensive. Also, they are typically for a shorter period than 30 years - often for 15 years or less. Depending on the property and on the loan program, you can sometimes get a second mortgage for up to 100% of the value of your property, although usually the most you can borrow is 90% of the value. Second mortgages are a great way to pull money out of your investments, and can be used to either finance another property or to reduce your down payment for the investment property you are buying. · Line of Credit (LOC) - A line of credit is like a cross between a mortgage and a checking account. To finance an investment property using a line of credit, you would have to open a line of credit from another property that you own (your house or some other real estate property) and then you could draw down on that money to help you buy the investment property. · Down Payment - The best way to lower your monthly mortgage rate is to make a large down payment. The higher your down payment, the better chance your loan will be approved and the better chance that your mortgage interest rate will be lower. Most investment property loans are considered commercial loans and require that you put down 25-30% of the purchase price. · Seller Financing - By using seller financing, you can reduce the amount of money you need to buy income property. For example, you could get a mortgage loan for 75% of the investment property value and then have the seller finance another 15-20%. There are usually state forms available for seller financing, or an attorney can draft one for very little. The problem with seller financing is that many lenders will not knowingly give you a loan if they know you are also getting seller financing. If you do get seller financing, you can expect your lender to increase the first mortgage interest rate. However, you could use seller financing to pay for 100% of the investment property (if the seller doesn't need cash immediately). Sometimes these deals are known as a contract for deed. · Using Equity from Another Property - Similar to the line of credit, you could get a loan on another property to either pay for the investment or to provide a down payment. · Find a Special Loan Program (city, county or government loans) - Depending on the location of your property and your personal profile, there may be special loan programs available. For example, if the property is historic or in a historic zone, you can get special loans to help you buy and renovate the property. Similarly, if you are low income, a veteran, or disabled you can usually qualify for special loans. The drawback for some of these loans is that you have to physically live in the property for a number of years. · Find Creative Ways to Finance Property - There are hundreds of creative ways to finance investment property. Please see our section on creative ways to finance investment property. For links to some of the best lenders on the web, click here.
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