The Best Ways to Finance Rental Property
Buying a rental property can be a profitable investment. Because of the high costs, though, most buyers will have to finance some or all of the entire purchase. However, buyers do have a number of different methods to finance a rental property each offering advantages and disadvantages that the buyer should understand before committing to a purchase.
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Bank Financing
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Bank or credit union financing is a popular option for buying rental properties as most buyers are familiar with the process from their home mortgage. However, lending guidelines for rental properties are more stringent than lending guidelines for primary residences. Lenders often require higher credit scores and larger down payments for rental property loans. Interest rates for rental property loans are also higher than loans for primary residences, often by two percent or more.
Owner Financing
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Not all rental property sellers will be willing and able to offer financing, but if it is possible, buyers should carefully consider it. Many sellers will be willing to finance the rental property at a lower interest rate than banks or credit unions. One strategy for buyers is to arrange owner financing for a period of time until the buyer can build up enough equity in the property to qualify for a lower bank rate loan. Buyers should consult with an attorney to make certain that the financing terms are clearly written and legally binding.
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Personal Home Mortgage
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Using equity in a personal residence to finance or partially finance a rental property purchase may be an option for some buyers. A mortgage or second mortgage on a home will often result in a lower interest rate than a rental property loan, but the mortgage will also put the buyer's personal residence at risk. Buyers should only consider this option if their current income will cover the costs of the mortgage even if the rental property does not create a profit. This is important for the buyer to reduce the risk of losing their primary residence.
Private Investors
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Rental property investors can also use private investor funding for rental properties. There are two basic ways to utilize investors to buy rental property. The investor may simply loan the money to the buyer for the purchase and charge interest on the loan. The investor may also become a co-owner of the rental property. The buyer and the investor will then share the profits from the rental property. This will reduce the potential profitability of the property to the buyer but reduces the cost of paying interest on a loan.
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References
- Photo Credit apartment building image by Christopher Dodge from Fotolia.com
