fund rental property

If you are like me, finding the funds to purchase a rental property is hard to do.  In order to fund rental property investing, you need to have some idea of your business plan and how much money you need to start investing.

When I began investing in rental properties I took the hard route and paid all cash for my first property. I had to skimp and save every penny in order to get enough for my first property.

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The key is that rental properties are amazing!

The more properties I buy, the easier it is to buy more properties. Now, the monthly income that all my properties bring in is almost enough for me to buy another property!

One of the major questions most people ask is: “How do you finance the properties?”

There are many different ways to finance your deals, and yes, there are ways to buy rentals with no money down. Even though you see many late-night infomercials with some guru telling you that anyone can buy real estate with no money down, it is very hard to do.

I have found that it usually does take money to make money.  The way I suggest to buy and hold onto real estate is through the “7 Cures for a Lean Purse” from the book “The Richest Man In Babylon”. One of the cures for a lean purse is all about paying yourself first.  This means to take 10% of your income each month and save it for future investments.

When you have saved enough money for a down payment on a rental property, you can then buy a rental and then start over again.  The beauty part is the more properties you get, the easier it is to buy more because of the increased income from the rents received each month.

Getting rich in real estate does not happen over night and does take some intentional hard work.

You are a real estate investor and it is your job to find ways creative tactics to finance your deals.  You can use one type of financing or combine multiple together to get the deal done.  As we are going through these different types of financing, try not to get overwhelmed because there is a lot to learn.


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You do not have to learn all of them at the same time but it is good to know of what types are possible for you. Each deal that you find for a property has unique circumstances that may require you to get creative by using one or two of these financing tactics.

To start, focus on a couple of these tactics I outline below and try to learn as much as you can about each one.  Try to keep your mind open though to the other tactics for financing your properties so that when you hit a roadblock on a financing deal, you can do more research on how to use the other tactics to finance the deal.

The list below is not an exhaustive list but is sufficient enough to get you started down the path of creative financing. Let’s get started.

 

Ways to Fund Rental Property Deals

 

All Cash

The king of all financing tactics is the all-cash deal. Remember that cash is King and in real estate it truly is. If there are two offers for a seller to consider, and one is all-cash and the other is using conventional financing, the seller will usually go with the all-cash deal.

This is because cash is quick, clean, and there are no banks to deal with that could get in the way of closing the sale of property. The all-cash deal is very attractive to sellers because it’s the easiest form of financing tactics available.

Honestly, this is probably how I buy the majority of my properties but is not the best way for a return on your investment (ROI). As you saw in day seven of the Free 7 Day Investing Course, using leverage and putting as little money out of your pocket down to buy the property, brings you the highest return.

The deal in day seven shows that with only $10,000 down you can get a 780% return on your investment in just the first year! Now if you had paid for the property all-cash your return would have been only 78% because you put $100,000 down to buy the property instead of only $10,000.  The less you put down for the property, the higher your return rate will be.

 

Conventional mortgage

Using a mortgage on a property means to get a loan from a bank who pays the purchase price minus the down payment you put towards the property. So if you buy a home for $100,000, and put $10,000 down, the loan you have is $90,000 that you will make payments on every single month until the balance is paid off.

The bank does this because they get interest on the money they lend you. Most conventional mortgages for an investment property require a minimum of 20% down payment and some can even ask for 25% to 30% depending on the lender you are working with. 30-Year-Fixed-Mortgage-Chart

Conventional mortgages usually have the lowest interest rate of all types of financing available.  There are many term lengths to choose from: 10yr, 15yr,20yr, and 30yr.  The longer the term in length, the more money you pay in total interest but the lower your payments will be.  See the chart to understand how you pay most of your interest up front in the first half of the term of the loan.

In the beginning, only 15% or so of your monthly payment goes towards the principal and 85% goes to interest.  Over time, the payment percentages change and eventually meet in the middle.

At the end of the loan, you are basically paying the principal balance of the note.  Needless to say, the banker makes his money at the beginning of the note and wants you to refinance again to start the payment schedule all over again.

 

FHA Loans

FHA loans is a loan from the Federal Housing Administration which is a department of the United States government who insures mortgages for banks. The banks basically get insurance on the money the lent you to purchase your home.  An FHA loan is strictly for owner occupied properties and not meant for investment properties.

The benefit of these types of loans is the low down payment which is usually 3.5% of the purchase price. Considering a conventional mortgage is a minimum of 20%, you are able to pay a much lower down payment to get into a house.  This is attractive because it means you will have a higher rate of return because you put less money down on the property.

Even though the FHA loan is for owner occupied only, there are ways to use this for your benefit of investment properties. Say you buy one property to live in with an FHA loan, you can then refinance the loan after 1 to 2 years to get you out of the FHA loan.

After that, you can then buy a second home with a new FHA loan and rent out the first.  You can also use this FHA loan to buy a duplex, triplex, or four-plex if you plan on living in one of the units and renting out the others.

There are negatives to this type of loan though. Each person can only have four total loans before FHA will not allow you to use FHA any more.  That means after you have four homes with a mortgage on it, you will not be able to purchase another home with an FHA loan.

Another negative is included in every month’s mortgage payments is a charge called Private Mortgage Insurance (PMI).  This is the payment you pay for the banks insurance on the money the lent you.

You are basically making an insurance payment just like you would your car insurance or health insurance but it goes to the FHA department for insurance in case you default on loan.

Only after you have 20% home equity in the property will this FHA PMI have the ability to go away. That has usually been the case but there are new laws that potentially make the FHA PMI permanent and may never go away until you refinance the home into a non-FHA loan.

 

Portfolio Lenders

Most banks who lend on conventional loans do not lend their own money but use other sources to fund the loan from a third-party. Even after the banks acquire a loan, they sell that loan to government-backed institutions like Freddie Mac and Fannie Mae in order to get back their money to make do it all over again.

Some banks and credit unions lend from their own funds on properties which makes them a portfolio lender because the money is their own institutions money.

Because the bank’s lending their own money on the portfolio note they are able to have more flexible terms and qualifying standards for each loan.

There are not a lot of banks actually do portfolio lending but if you do a search on the internet you may be able to find somebody in the area you are investing who does portfolio loans to help you purchase a property.

 

Owner financing

Another way to finance properties is to have the homeowner be the bank.  The deal would be to have the homeowner hold the note against the property just like a bank would if they lent you money to buy the property.

If the seller is in a position where they can hold the note, you would negotiate with them the terms and interest rate just like you would with a bank. Obviously the lender is the homeowner and would have his own requirements for you like: down payment, interest rate, terms, balloon payment, and other requirements that he may come up with.

It is only worthwhile to you as an investor to do owner financing if one of two things are true.

The seller owns the property free and clear, or the mortgage that he has on the property is an assignable loan. The former is where the owner does not have any outstanding mortgages on the home and owns the property outright.  The latter is a loan that the owner can sign his rights and obligations over to you as the buyer and the mortgage company will now see you as the homeowner and note holder taking his place.

It’s not advisable to purchase a home with owner financing if there is a mortgage on the property that cannot be assigned because most mortgages have a “Due on Sale” clause. This is a way for the banks to protect themselves by calling in the note immediately when there is a change of ownership on the property.


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If the full balance of the note cannot be paid, the lender has the ability to foreclose on the property and take the property away from you. Some investors don’t mind the risk and buy the property subject to the other loan and risk the bank foreclosing on the property.

I have seen how other investors have done this and it seems like as long as the mortgage payments are being paid the bank doesn’t concern themselves because the note is still current.

Owner financing may be one of the best ways to get a property with little or no money down because the owner is in control and not a bank.

You don’t have to worry about lenders, underwriters, or any other potential hang-ups stopping you from getting the property.

 

Hard Money

A hard money loan is a type of loan from a private business or individual that you can obtain to invest in real estate. This term sounds scary at first glance because one may think of a Mafia gangster named “Jimmy the Wolf” with a baseball bat ready to bust your knees if you don’t pay. This is just not the case, but you should also stay away from “Jimmy the Wolf” for health reasons.

Hard money has many advantages over other forms of financing but do have some drawbacks. Some benefits include: no income verification, no credit references, the deal can be funded in a couple days, loan is based on the value of the property after repairs are done, and you can have the rehab costs included in the loan.

The drawbacks are: short-term notes (6 months to 3 years), much higher interest rates (15% or more), more loan fees to obtain the loan (points).

Before you get a hard money loan make sure that you have multiple exit strategies so you don’t get caught between a rock and a hard place and lose lots of money. Some exit strategies may be where you fix and flip the property and make a profit when you sell the property and pay back the hard money loan.

Another would be to refinance the property after six months to a conventional mortgage with longer terms and lower interest rate.

Even though there are some drawbacks too hard money loan, hard money can be a very effective way of making money in real estate if you do it right. In order to find hard money lenders, check the internet and talk to real estate agents for references.

 

Private money

Private money is money a loan from anyone who will lend it to you. It can be your mother, your uncle, your college roommate, even the shopkeeper down the street. This is basically a relationship loan because of the credibility you have built up with the individual lending you money.

If you have proven yourself trustworthy and have integrity, you may be able to present a deal that you are working on to one of these private parties and bring them in as an investor.

The benefit for them is they will get a higher rate of return than they would in a savings account by receiving interest on the money to lend you. The interest rate and terms are up to you to negotiate with them and they basically become the bank for you.

A private lender is solely there to lend you money with interest interest and usually does not take equity in the deal nor cash flow from the property. That means that you own the property outright and all cash flow is yours minus the note payment you pay private investor.

The goal is to take the money from the private investor, much like you would with a hard money lender, buy a property and then refinance out the money you borrow from the lender.  Now you will hopefully have a conventional mortgage on the property at a lower interest rate and longer terms.

A way to find private money is to let everyone you know and meet that you are a real estate investor. This can be from casual conversations like “What do you do for living?”. You can answer simply, “I am a real estate investor who invest in rental properties that give a passive income each month in cash flow”.

Your honesty and integrity are your calling cards when you search for private money. If people see you as some may they cannot trust they will not lend you any money because they don’t believe that you will pay them back.

 

Home equity loans and lines of credit (HELOC)

If you currently own a home you may have equity buildup in the property that you can use to purchase more rental properties. A home equity loan is basically a loan against the equity that you currently have in the property. These types of loans do not normally exceed 80% of the value of your home, but if you have enough equity in the property it can be a very good way to purchase more rentals.

For example: If you own a home that is worth $200,000, and you only owe $70,000, you would be able to borrow up to 80% of the $200,000 minus the original note of $70,000. 80% of $200,000 is $160,000.

Subtract the $160,000 by the amount you currently owe ($70,000) and you have $90,000 left to borrow from your equity.

A good way to use this loan would be to purchase a $90,000 property that will make you money each month from the rents and use that money to pay the mortgage payment each month.

A mortgage payment of $90,000 may be around $650 a month and you can buy a property that rents for $1000 giving you a profit of $350 month cash flow.

This new rental property is now free and clear to get another home equity loan on and do it all over again.

A home equity line of credit (HELOC) is similar to a Equity Loan but the only difference is that the HELOC is a revolving line of credit like a credit card.  With a HELOC you can borrow money against the equity on your home and then pay it off at any given time so as to not incur any interest if the balance that is zero.

The small annual fees that you incur having the HELOC are minimal compared to the value that it brings you two have money at your fingertips ready for the next deal.

 

Partnerships

A partnership is like a loan from a private investor but instead of getting a monthly note payment, the investor gets equity in the deal. That means the investor owns a portion of the property and likewise a portion of the income and expenses.

The equity stake the investor takes in the partnership is all negotiable and should be discussed when presenting the deal.  The equity portions is usually based on the total cash invested from each party to the total cash invested as a whole for the deal. The major benefit with a partnership is economies of scale.

All parties involved bringing money into the deal and can buy a larger building, apartment complex, or whatever type of deal you were going to purchase.

It is called synergy.

Synergy: The creation of a whole that is greater than the sum of its parts.

 

I’ll give you an example from my experience with other investors I work with. Separately, each investor has a small amount of money to put towards a property, but together we all combine or money and have the ability to buy a much larger apartment complex.

If each of three investor brings in $50,000 into the deal then we will have a total of $150,000 for the purchase. On a commercial loan for an apartment complex the minimum down payment is 20% so the ability to buy a property work like this:

Individual
Duplex with $1,600 monthly rent
Total Purchase Price: $250,000
20% Down payment:   $50,000
Partnership
18 Unit Apartment with $8,000 monthly rent
Total Purchase Price: $750,000
20% Down Payment: $150,000

For an individual, $50,000 is 20% of $250,000 and can possibly by you a duplex or a triplex. With a partnership, $150,000 is 20% of $750,000 and can buy a small apartment complex with 15 or more units depending on the area. The rent to price ratio has increased, as well as the price per door has gone down.

With the duplex, you pay $125,000 per door, but with a partnership the per door cost is $42,000. As you can see the purchasing power of a partnership will allow you to buy a much larger property with more monthly rent.

There is much more to learn about partnerships and investing in multi-family properties but this might just whet your appetite to learn more about it.

The goal of any investor in rental properties should be to progress into apartment complexes because that is where the money truly is.

There are many things to learn from single-family homes before you should attempt to move into multi-family apartments.  Start with single family homes first and progress in properties as your skills progress.

 

Putting it all together

As you can see there are many different ways to finance properties and this list is just a few of them. Again, your role as a real estate investor is to find creative ways to purchase rental properties and work hard to not use your own money if it all possible.

Since each deal is totally different depending on the circumstances of the seller, it is difficult to say which method is the best. What you can do is try to understand each method and learn how to apply them to each deal so that you will be ready when the deal comes.

If you have a comments or questions, please leave them below. I would love to talk to you about financing properties!


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7 Ways to Fund Your Rental Property Deals
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