Are you looking to break into the wonderful, incredibly enticing world of long-term real estate investment? Acquiring rental properties and holding them for many years is the process that has generated many millionaires in this country and abroad.
For the average wage earner, it’s arguably the best path forward to wealth and a secure financial future. It offers much more benefits than investing in stocks or paper assets.
And the beauty of buying and holding real estate is that you can get real estate loans to help you acquire these assets. As long-term investors, the more rental properties you can acquire, the faster you can build wealth, retire, and live the life you want.
Wondering what long-term loans are available for investors? Wondering why and how to finance a rental property? Keep reading for everything you need to know about financing your way to true wealth.
You Should Finance Every Property
Many old-school investors, or would-be investors, wonder if it makes more sense to bypass the financing process and instead save up cash to buy a rental property outright.
If you are already a millionaire, this might be a decent strategy for you. However, for the rest of us, financing is our best friend.
Financing a rental property essentially means that other people are lending you money to invest. In very few areas of life can you borrow money to acquire cash-flowing assets that appreciate in value.
In the stock market, you can’t borrow your way to a large portfolio. You need to fork over your hard-earned cash, one dollar at a time.
But when it comes to real estate, because the loan you are acquiring is secured by a real asset, other people (banks) are happy to lend you money in order to build your wealth.
Leverage is a beautiful thing. It allows you to acquire a $200,000 house for just $40,000. It can allow you to acquire $1 million worth of rental real estate for a mere $200,000.
Most experienced investors will tell you that the key to wealth is leverage. It allows you to acquire vast amounts of property much faster. And when you own the property, you become wealthy.
Even when you have a mortgage on the property, the house is appreciating in value each and every year. So your equity continues to climb.
Plus, you don’t even have to pay the mortgage back yourself. That’s what your tenants are doing. So the bank gives you the loan to acquire the property, and your tenants make the monthly payments. You get to sit back and enjoy the cash flow, the appreciation, the mortgage pay down, and the tax advantages.
Financing Rental Properties
So how can you finance rental properties? There are many strategies utilized by investors.
While most investors have a favorite strategy, there’s a good chance that you’ll likely utilize multiple funding strategies over the course of your investing career. Here are the top funding strategies to know about.
Rental Property Loans
The standard method of financing a long-term rental property is with rental property loans, otherwise known as investor loans. These essentially function as a standard mortgage, with stricter requirements.
Most investor loans require at least a 20% down payment. Some lenders require as much as 30%. Lenders generally set a higher credit score requirement, since this won’t be your primary residence. And you can expect a slightly higher interest rate than you’d get with a loan for a primary residence.
And you’ll need to have sufficient work and income history in order to qualify. No recent job changes should be in your history. You may also be able to use your projected rental income as part of your monthly income on your application.
Most investors choose a 30-year loan on their rental properties, which allows the monthly rental income to pay for the entire mortgage payment.
House Hacking and a Standard Mortgage
For a more accessible financing strategy, you could consider house hacking. With this strategy, you’ll buy a multi-family home, ranging from two to four units.
You’ll live in one unit, allowing you to get a personal mortgage for the property, even though you’ll rent out the remaining units. With a personal mortgage, you can get a much smaller down payment, typically between 3.5% and 10% down.
Plus, interest rates will be lower and requirements generally more flexible than with a standard investment loan. The downside is, of course, having to live in the rental property.
Your plan should be to move out after a year, renting out the entire property, and collecting some nice cash flow. You could then repeat the process, obtaining multiple multi-family properties over the course of a few years, or start investing in individual properties now that you have more experience and more capital.
BRRRR is a unique strategy that allows you to recycle your cash flow from one property into the next, allowing you to rapidly build your rental portfolio.
To get started, it’s recommended that you save up enough money to purchase a house with cash. When you have cash in the bank, you can buy a run-down property that needs a lot of work. Banks don’t typically lend on these types of properties.
Once you purchase the property, you can fix it up, and rent it out. After it’s been updated, the property will be worth much more than what you paid.
You can then get a mortgage on the property, pulling out most of your equity, and putting that cash into another property. When done properly, this strategy can eventually help you obtain multiple properties per year.
Down Payment Strategies
Along with your financing method of choice, you’re also going to need a down payment. Depending on your strategy, this could be as little as 3% or as much as 30%. Here are some common methods for sourcing a down payment.
Many aspiring real estate investors have plenty of capital deployed elsewhere. If you have a ton of money invested in the stock market, earning you paltry returns, consider pulling some of that out and deploying it in real estate.
You can enjoy a much higher return on your investment, as well as tons of tax savings compared to investing in stocks.
Using Home Equity
One of the most common methods of sourcing funds for a down payment is with existing home equity. If you own your home, you likely have equity that isn’t accomplishing anything for you.
Instead of letting it sit there, you can put it to work in order to grow your wealth. You can get a home equity loan or a home equity line of credit (HELOC), in order to borrow against your home equity.
Or, you can perform a cash-out refinance, getting a new mortgage, and pulling out your equity in cash.
Using Gifted Funds
Some loan programs allow you to use gifted funds, while others do not. Funds gifted from a relative can be a great way to get started on your real estate investing career.
Many relatives will be happy to gift you the money, knowing that you are going to use it to acquire real estate, rather than wasting it on fancy cars or expensive vacations.
Be sure to research the requirements of whichever loan program and lender you are planning to use before accepting any funds from family or friends.
The tried and true method of starting off an investing career is saving up the money ahead of time. There are many ways to save money and plenty more methods of earning extra income each month.
Create a plan to save up for a down payment in one year. What will that require in the area you plan to invest in?
Once you know how much you need, set a monthly budget. Find out ways you can cut costs and divert wasted funds into your investing savings goal.
Once you’ve automated some monthly savings, find ways to earn extra cash. You can try driving for a rideshare company, delivering food and groceries, renting out a room on Airbnb, or just getting another part-time job.
Remember, it’s only temporary. Use it as a learning experience and enjoy it, knowing that it will empower a lifetime of real estate investing.
Tips for Long-Term Investors
There are a few things to keep in mind as you start building your investment portfolio. One thing you’ll discover very early on is that managing your own properties is time-consuming. Once you have more than two or three properties, you should outsource to a property management company.
They can save you tons of time by managing tenants and applications, handling repairs and maintenance, and ensuring your property is always rented out.
That way, you can spend much more time acquiring additional properties rather than answering phone calls and fixing toilets.
Leverage Is the Secret to Wealth
Real estate is the most beautiful investment class on the planet. No other type of investment allows you to utilize so much leverage in order to build your wealth.
It truly is the best-kept secret of the wealthy. Long-term investors will do well to utilize rental property loans to their advantage.
Looking for more articles like this? Visit our blog today to keep reading.