If you’re looking to get into the game of real estate investing, you have a few choices for financing. Ideally, purchases are made with cash but that’s not realistic for most first time investors. This means you’ll likely be taking out of a loan of some kind, but what’s the best fit for you?
Here are 4 different ways to fund your first investment property:
It’s no surprise to see conventional loans on the list. This is the most standard way of purchasing a house. As you start the process of purchasing your first property, talk with your real estate agent to get a referral for a trusted loan officer. Finding a loan officer you can trust will make your career easier. Conventional loans generally require a down payment of 20% so you still need cash on hand. You will get approved based on your personal credit score and income, not including potential rental income.
If you aren’t looking to get into the long term game then you may more interested in doing a fix and flip. You can get loans specifically designed for this type of investment. Again, you’ll want to work with a trusted loan officer to get approved for this type of loan and understand the options available to you. Fix and flip loans are generally short-term loans that allow you to flip the property and get it back on the market quickly. These loans are essentially hard money loans, meaning the loan is secured by the property. You can find these types of loans through either a lender or some real estate crowdfunding platforms.
If you already own property, another option to fund the purchase of an investment property is to borrow from the equity you already have. You can usually borrow up to 80% of your home’s equity to use toward the purchase of additional property. Be careful with these types of loans, however, as they can increase the life of your current mortgage, increasing your expenses. Your trusted loan officer can walk you through what this process would look like and help you make an informed decision.
A self-directed IRA means that the IRA custodian accepts or offers alternative investments. Each year, you need to value your investment and report it to your custodian. The right IRA custodian will walk you through the purchase of real estate through a self-directed IRA. Keep in mind that these accounts do come with fees so it’s important to do your homework to see if it works with your cash flow. It’s also often advisable to establish an LLC when using this path for purchase.
At the end of the day, most investors will turn to a conventional loan for the purchase of their first property, but working with a trusted real estate agent and loan officer will help you make an informed purchase that best serves your bottom line. If you’re ready to start looking for your property, schedule a meeting today! We can help you find a property and stay on board as a property manager once you’re settled.