Property Management Blog

Financing A Rental Property for First Time Landlords (5 Ways To Get The Money)

Richey Property Management - Sunday, February 27, 2022

So you’ve found the perfect rental property, but now you need to get the money to finance it. In this video, I’ll show you how you can get financing for your new rental property and also some other options for money that you might not have thought about. So if you're a new or experienced landlord, subscribe to our channel, because we share tips here based on our stories and our experience as property managers, to help you become a better investor and landlord.

You may have contacted a mortgage lender to discuss what your options are for financing if you're considering buying a rental property, and that's a very perfect place that you want to start when looking at buying something.  You obviously need to know how much you can qualify for, and you need to understand all the different kinds of loan products that are out there for investors. My name is Sue Richey, I'm a real estate investor, and I'm also the Broker of Richey Property Management. We manage about 300 properties in the Northern Virginia DC suburbs. And we have a, a lot of experience with financing for rental properties. 

Option number one is your conventional loans. I was talking to one of my go-to lenders and what he said right now in our marketplace is that 30 year and 15 year conventional loans are really products out there for investors. The days of the interest only loans and the adjustable rate mortgages, well..  those are kind of gone.  You see them in the market a little bit, but the rates just really don't make sense. So this is the kind of product -the 30 and 15 year fixed mortgages- that investors are really using if they're going to go the loan route. And if you're a new investor, this is most likely the way you are going to finance your first rental property. 

And what does that mean? 

An investor loan is different than an owner, occupied loan, mainly because of the down payment. Most lenders will require at least 20 to, to 25% down.  You can get as low as 15% down, but those interest rates are going to be higher. And you're going to get your best interest rates if you put down 25% and you have good credit.

Also Freddie Mac and Fannie Mae have investor loans for one to four unit rental properties. So if you're looking at a property type, that's more of a multi-unit versus a single family home. And you're thinking, well, I'll buy a duplex or a fourplex and I'll live in one half and I'll or live in one of the units and I'll rent out the others. There are programs out there that are FHA and VA. Those are available for us in the DC area. So you want to check in your area and make sure that those loan programs are available because they could be a good option for you.

Option number two is a HELOC. If you don't know what HELOC means, it means home equity line of credit. This is different than a loan. This is really just a line of credit. And this is designed for people who have equity in a home they currently own. So if you don't own something, then this is this isn't really going to apply. But if you own your home that you, that you live in and you have a decent amount of equity in it, you could use some of that equity and make it work for you. And here, how you do that.

Let's say you have $300,000 of equity in your home. A lender is going to loan you about 75 to 80% of that equity value and allow you to use that as a line of credit. So you could draw on that line of credit, use it to buy a rental property, outright, all cash, or you could use it to buy or to fund the down payment and maybe put a significant amount of money down, lowering your mortgage rate and helping your property cash flow. So you can use the equity in your current home and use it to purchase or finance another income producing asset for you.

So option number three is seller financing. This is probably a term you've heard. Maybe you're not familiar with how it works. And honestly, a lot of sellers really don't know how it works and that's why they shy away from it. But it can sometimes be such a great solution for both the seller and the buyer. And here's how it works with seller financing. The seller basically acts like the bank. And this works when a seller let's say owns their home outright and they don't have a mortgage on it anymore, but they want to sell it. And you as a buyer are looking to purchase it, but maybe you don't have a big down payment or maybe your credit isn't so great. You can go to a seller and say, hey, would you provide seller financing? You work out all the terms with them. You work out the down payment, you work out what you're going to pay them every month and what the interest rate will be.

And it's treated just like a legitimate note from a bank. This isn't just something like a handshake- you have an agreement and it's recorded like any other real estate transaction. You do a closing at a settlement company, just like you would with any other property. You just make the payments to that seller until you satisfy that note.

The advantages to a seller are that maybe they want to sell but they don't want to take a big tax hit because if they sell the property and get a big lump sum, they've got a big tax obligation in that year, by doing seller financing, they could spread out that tax obligation over a number of years and as a buyer, you don't maybe have to put down as much money. You could put down say, $5000 or $10,000, $20,000 instead of maybe $50K or $80K.  Depending on the price of the property, you can negotiate any of the terms you want the like the length of the note, etc.

And so it really can be a win-win for both of you, if you set it up correctly. So it takes some digging because not every seller wants to do this. Most sellers selling their home, want to take all of their money right now. So if you can find someone to, to do this, it really could be a good option. 

Option number four is cash. This is not always a good option for a new investor because most people don't have the cash. Although I have to say, I've worked with several investors in our area and helped them purchase homes. And these were their first rental properties and they did use cash because they decided they wanted to take it out of some other investments and put it into real estate market which is a great way to diversify your portfolio. The pros of cash as a buyer are that you might be able to negotiate a better price with a seller because you can close quickly. The seller doesn't have to worry about whether you're going to get a loan or not, and take their house off the market. And as a seller, it's great because again, it can close quickly, but not everyone has all the cash to purchase a property outright. So as a new investor, it's probably not going be the right strategy for you, but it could be depending on your situation.

Option number five is hard money loans. You may have heard the term hard money lenders and they're out there, but this type of this type of money is really designed for the short turnaround. And that's because the interest rates are so high, you can look at anywhere from 12 to 18% for hard money lenders. You obviously don't want to have this kind of interest rate over 5, 10, 20 years, but it's really designed for sort of the investor who's looking to fix and flip a property. So you need money fast. You don't want to wait and go through all of the red tape you have to go through with a traditional mortgage and maybe some of those upfront costs. So you look at a hard money lender. You need to go to them with a business plan and with a deal. You find the deal and you put together a plan of this is how much it's going to cost to renovate. You’ll explain the type of renovation and the timeframe and what you think it could sell for. And the profit you can get out of it. And if you go to them with a good deal, you're likely to get the money, but know, you really need to work that plan because you don't want to be sitting on a really high interest rate for a really long time. It's going to cost you a lot of money. I've never personally used any hard money lenders, but that's sort of how it works. And if you're a first time home buyer fixing and flipping might not be the right strategy for you, but it might, you might have the risk tolerance to do that and find a great deal. And it might make a lot of sense. 

I personally am much more in line with the buy and hold strategy. And that's how we've accumulated the rental properties that we currently have. 

So there you have it, five different kinds of options for getting money and financing your rental property. You just really need to decide and do some homework on all of those and figure out what makes the most sense for you. Buying an investment property is really exciting, and hopefully you can get out there and find a great deal and one that will cash flow nicely for you, but make sure that you do your homework and find out the best way to finance it.