Financing your Rental Property

Investing in real estate is an endeavor that requires more than just basic knowledge of the market; however, this shouldn’t be the reason for the beginning investor to shy away. Knowing some of the basics of owning rental property will get you started on the right track. The first thing the smart investor must understand is financing your rental property. 

Lenders aren’t as eager to finance an investment property as they would be to finance a primary residence. As with any business, the lender is taking a risk that is contingent on the investor’s success. For this reason, the lender will likely require a more sizable down payment, and the investor should expect to have at least 20% of the purchase price readily available.

This could be a deterrent to an investor just starting out in rental properties. However, there are financing avenues available that don’t require funding from traditional lenders. One such example is seller financing. In this situation, the owner of the property acts as the bank. The investor and the owner work out a reasonable down payment and the owner then carries the loan on behalf of the investor. While this makes it possible for the borrower who might not otherwise qualify for a traditional loan, one drawback would be paying a higher interest rate on the loan.

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Other lending sources that the investor may not be aware of include crowdfunding, tapping into the equity of the borrower’s primary residence, and even borrowing a down payment from family and friends. With crowdfunding platforms, the borrower can request funds from family and friends as well as complete strangers. Best of all, the funds that come in through crowdfunding don’t have to be paid back. The people who are donating simply believe in the cause to which they are contributing.

Understanding financing is just one area in which savvy investors should educate themselves. Other areas the beginner needs to explore include knowing what type of property in which they wish to invest. Compare multifamily properties, single-family properties, and commercial properties. All come with unique traits with which the investor should first make themselves aware.

Finding the right lender or borrowing solution is just one step in the real estate investment process. Starting out on the first investment project can seem like a daunting task, but with good knowledge and ambition, anyone can get started in rental property ownership.