Investing in a property takes money.
Investing in a Los Angeles-area property takes even more money.
You know this is an expensive market. And, unless you’re showing up with a lot of cash, you’re going to have to finance your investment.
How will you do that?
Bell Properties has some ideas for you, and we’re sharing them today. What we want to remind you of is this: every investor is unique. The financing options that work for one person will not always work for another. Before you begin to explore the possibility of financing and investment property, you need to examine your own financial situation. Put it under a microscope so that you’re intimately aware of your debt, your income, your credit score, and how your assets measure up against your liabilities.
Then, be prepared to go public with that information, because lenders are going to use a microscope that’s zoomed in even more.
It’s expensive to borrow money these days. But, still worth the cost when you’re using that money to invest in real estate.
Here’s how you should set about exploring financing options for investment property.
Ways to Finance your Los Angeles Real Estate Investment
As you begin to gather your options, let’s start with some of the most common ways that most investors pay for their real estate investments:
Work with a Traditional Mortgage
If you’ve ever taken out a home loan, you have a general understanding of what that process looks like. In order to qualify for a mortgage in order to buy a rental property, you’ll have to meet all of the same qualifications that you did when you applied for your own mortgage.
Some lenders will have stricter standards when you’re taking out a mortgage for an investment property. They believe it’s easier to default or walk away when it’s not a home you’re living in yourself.
Still, when it comes to investing in real estate, traditional loans are one of the most common options available. These loans are typically offered by banks and other financial institutions. Traditional loans require a good credit score and may take a long time to process, but they offer lower interest rates and long repayment terms. They are ideal if you are planning to hold onto the investment property for a longer period.
Right now, interest rates are historically high. This should not preclude you from getting a traditional loan, it’s simply something to be aware of as you shop around for the best rates and evaluate your own creditworthiness.
For a single-family property, you should expect to put down at least 15 or 20 percent in cash. If you’re planning to buy a duplex or a multi-family investment, your down payment may have to be a bit larger.
Thirty-year mortgages are the most common when it comes to investment properties, but if you’re in a hurry to pay off the debt, you can also apply for a 15-year or a 20-year mortgage.
Explore the World of Hard Money Loans
Hard money loans are a popular financing option for real estate investors, especially those who need quick cash to take advantage of a good investment opportunity. Hard money lenders are private investors who lend their own money and typically have a less stringent approval process than banks and traditional lenders. You won’t have to work so hard to prove you’re a worthy credit risk. But, you might find yourself paying a higher interest rate.
Think about what you’re ultimately planning to do with your investment property before you take a hard money loan. Because of the high interest rates and the shorter term of the loan, most investors will explore this option only if they’re planning to hold onto the property for a few years. If you’re flipping a property, this might be the best option for you. If you’re expecting to hold a rental for 20 years or longer, you might want to find a cheaper way to finance your property, or expect to get a traditional loan later.
Portfolio Loans for Real Estate Investors
If you’re having trouble qualifying for that traditional mortgage for some specific reason, you might want to consider a portfolio loan. These are usually best for someone who doesn’t qualify because they don’t have an income that can be verified, for example. But, maybe the borrower’s assets are impressive and would cover the risk. Portfolio loans are ideal for investors with multiple properties who want to streamline their financing and payment processes.
A portfolio loan is a kind of mortgage that a lender originates and retains instead of selling on the secondary mortgage market. They remain within the lender’s portfolio. Usually, these are more flexible than traditional loans. They can provide a range of financing options, including lines of credit, refinancing, and cash-out refinancing.
FHA Loans
Federal Housing Administration or FHA loans are available to real estate investors who will buy a multi-unit property (up to four units) while living in one of the units.
This isn’t for everyone. But, if this sounds like an investment strategy you can live with, you’re going to like the terms that are provided with this type of loan. FHA loans require a lower down payment (as low as 3.5 percent). You can also get approved with a lower credit score than a traditional mortgage would allow, and there are often better interest rates available.
These loans will often require mortgage insurance, which can increase the monthly payments but offers some protection against default.
Seller Financing:
Have you considered seller financing? This can be a great option if you can’t get a loan from a traditional lender or need more flexible repayment terms. In this option, the seller agrees to finance the purchase directly. The terms of the loan, including interest rates and repayment terms, are negotiated between the buyer and the seller. However, not all sellers are willing to offer seller financing, and it may come with higher interest rates and stricter repayment terms than traditional loans.
Private Lending
You might also explore whether private lending is an option for you. Similar to hard money loans but often with more negotiable terms, private money loans come from individuals or small groups interested in investing their funds in real estate projects. You might get a private money loan from friends, family members, or professional investors.
At Bell Properties we recommend private money loans for investors who may not qualify for traditional financing or who need more flexible terms. Just make sure everything is documented in a legally binding agreement to avoid potential conflict.
For some investors, private lending means hitting up relatives or friends who have money to lend. Otherwise, you’ll have to rely on real estate networks and introductions in order to find people who might be willing to lend you money.
Home Equity
If you already own property, tapping into your home equity can be a powerful tool. You can take out a home equity loan to finance part or all of your acquisition. Or, you can apply for a home equity line of credit (HELOC), which will provide you with funds up to a certain limit, which you can draw from to pay for your investment property. The interest rates can be lower than other types of loans, but bear in mind that your first home becomes the collateral, which presents its own set of risks.
Buying an Investment Property with Retirement Funds
You can use the money you have vested in an IRA or a 401K retirement plan to fund the purchase of an investment property. This has become more common than it once was, but you need to make sure you understand the IRS rules and restrictions. Otherwise, there may be penalties that surprise you.
To buy property with your IRA, you must have a self-directed IRA, which allows for real estate investments. You may find yourself paying extra taxes, and there are certain transactions that the IRS will prohibit around disqualified people using retirement funds. You’re also not permitted to directly benefit from this property purchase, which means that you can only use the property for investment purposes.
Talk to a tax attorney or a CPA before you tap into your retirement plan to purchase an investment property.
You STILL Need Cash: How to Budget
Financing is a great way to leverage other people’s money to fund your investment.
But, you’ll still need plenty of your own cash.
First, there’s the down payment. When you’re getting a mortgage through a traditional bank or lender, don’t expect to get 100 percent financing. Those days of full financing are long gone, and you’ll need cash upfront for the down payment. The amount will depend on a number of things, including:
The property that you’re buying
Your own credit history
The strength of the economy at the time you apply for the loan.
Typically, banks will want to see around 20 percent down for an investment property, maybe more depending.
You’ll also need cash for inspections, closing costs, and all the cleaning and remodeling that you’ll likely do once you have closed the deal, and you’re getting the property ready for the rental market.
Financing is an essential part of real estate investing, and choosing the right option can mean the difference between success and failure. Consider the options available, and explore the benefits and drawbacks of each. If you need some help, we’re here. Contact us at Bell Properties.
