How to Finance a Rental Property

Owning rental property is a great way to build wealth. After making a down payment, you can use the monthly rental receipts to make the mortgage payments. After repaying the loan, you can then sell it for a large lump sum payment or continue to collect rent from it. 

If you are thinking about investing in a rental property, there are several ways you can finance the purchase. The following are six methods for how to finance a rental property.

Conventional Loan

If you are a homeowner, you are probably already familiar with conventional loans. Offered by banks, credit unions, and other lenders, these loans are among the most common ways that people finance houses, condos, and other properties. 

Conventional loans can also be used to finance rental properties. Although the process for applying for a conventional loan for a rental property is similar to a personal residence, the qualifications to be approved are usually more stringent. This is because lenders view rental properties as being riskier. After all, they have a higher default rate than personal residences. 

To qualify for a conventional loan for a rental property, you will need a strong credit score. The debt-to-income (DTI) ratio requirement will also be stricter than for a personal residence. Lenders want to make sure that you can afford both your home mortgage and the new mortgage for the rental property. 

Finally, you may also be required to put down a higher down payment. Depending on the lender, a down payment of up to 30% may be needed. 

Hard Money Loan

A hard money loan is a type of financing that comes from companies and private investors. These loans are best suited for those who intend to buy a property, fix it up, and then flip it for a quick profit. It may also be possible in some cases to purchase a rental property with a hard money loan and then later refinance it with a conventional loan. 

The primary advantage of hard money loans is that they are usually easier to qualify for than other loans. Although investors take into account the buyer’s financial history, they are mostly concerned with whether a property is profitable.

Another advantage of hard money loans is that they are usually much quicker to obtain than conventional loans. If you are in a hurry to close on a property, a hard money loan can usually be obtained in a few days. Conventional loans, in comparison, may take several weeks to obtain.

Hard money loans do have an important negative to consider. The interest rates are usually much more expensive than other loans, which is why they are best for short-term financing. 

Private Loan

A private loan is money that is borrowed from an individual. These loans are usually obtained from someone the borrower knows—like a friend or family member. 

The terms for private loans vary widely and depend on your relationship with the lender. You should give thought to how your relationship with the lender will be affected if something happens and you are no longer able to make the monthly payments. 

Home Equity Loan

There are three ways you can use the equity in your home to finance the purchase of a rental property. They include a home equity loan, a home equity line of credit (HELOC), and a cash-out refinance.

With a home equity loan, you may be able to borrow up to 80% of the equity you have in your home. One caveat to consider with a home equity loan is that if you default, there is the chance that you could lose your home, which serves as collateral.

With a HELOC, you are given a line of credit that you can draw from as needed for a certain period of time, which is known as the draw period. These loans are best suited for renovation projects and not for financing the full rental property purchase.

An important benefit of a HELOC is that you can make interest-only payments during the draw period. The full amount of the money borrowed will be due, however, when the draw period ends, which may result in a balloon payment.

With a cash-out refinance loan, you obtain a new mortgage to replace your old one. Your new loan will be larger than the balance you owe on your home because you will receive extra cash from your home’s equity. These loans may not make sense if interest rates are currently higher than your original loan’s interest rate. 

Seller Financing

Seller financing is when the seller agrees to let you give him or her payments for the property over time instead of accepting payment for the full amount upfront. The seller becomes the lender. If a seller agrees to such an arrangement, a formal contract will be created by an attorney.

Another option is an arrangement where the seller finances the down payment instead of the full amount. You would still need to obtain financing from another source for the remainder. Because seller financing is sometimes done when a buyer is unable to obtain a loan from another source, interest rates for this type of financing are usually high. 

Finance Your Rental Property With OUCU Financial

Perhaps the best option to consider if you are wondering how to finance a rental property is a rental property loan, like the one offered by OUCU Financial. These loans were created specifically for rental and investment property buyers like you.

With a rental property loan from OUCU Financial, terms of up to 30 years are available and up to $7 million can be borrowed. Fixed interest rates are available so you can lock in a great rate while rates are low. These loans can be used for either single-family rentals or multi-family buildings.

Real estate has been a proven investment vehicle for generations. Before you buy your first investment property, be sure to check out the following article to learn more about the cost of ownership, expenses, and other things you should think about before becoming a landlord.

What You Should Know Before Buying a Rental Property  LEARN MORE ABOUT OUCU RENTAL PROPERTY LOANS