Best Way To Borrow Money For Investment Property

What Not To Do

Dont ask any one investor for $20,000. Though in this case, you need $25,000 to cover expenses. Do not ask one person for that money because if you do, theyre just going to go the other way.

These are people that know you, like you and trust you, and if you ask someone for $25,000 they will get very, very, nervous.

You must start small with a very small group of friends and tell them, Im getting a property for 60%, 70%, 80% off the market price, and it has no mortgage. Im going to buy it 20 cents on the dollar, and Im raising $25,000.

If you ask them for $5,000 each, they might listen to you. Most people could put $5,000 on a credit card.

Alternative Ways To Buy An Investment Property

While weâre clearly encouraging you to save for a 20% down-payment, itâs worth mentioning the alternative ways to buy an investment property without a 20% down-payment. These strategies to finance a rental property, among other methods, are frowned upon by some investors and financial experts, because they can come with higher risks and costs. If youâre thinking about using one of these strategies to buy an investment property, be aware of everything that comes with the territory.

• Partnerships. As the saying goes, itâs not what you know, itâs who you know. A partnership with another investor can allow you to put less money down and get a share of the profits. Donât partner with someone that is a complete novice in real estate investing, but rather, work with someone who has experience or that will complement your skill set.

There are partnerships that dont require both parties to put money down. You can find an investor willing to pay the 20% down-payment and closing costs, while you are responsible for the brains of the investment. Meaning, you do the actual work while they provide the financial resources. No matter what type of partnership is pursued, outlining everything in an official document is crucial.

Reduce Rental Property Loan Costs

The lower your loan costs are, the larger your cash flow could be. Here are some of the best ways to keep your loan costs low when applying for a rental property mortgage:

• Research the best loan terms and conditions by speaking with lenders and mortgage brokers who know the local real estate market.
• Maintain a good personal credit score and use a conservative LTV with a down payment of around 25%.
• Prepare your mortgage application docs ahead of time items such as W-2s, bank statements, and tax returns to show the lender youre a serious real estate investor.
• Generate income statements, net cash flow, and capital expense reports for any existing properties by automatically tracking income and expenses on Stessa.

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How Property Investment Could Work For You

The uncertainty of the past couple of years has led many of us to reassess our financial goals. A recentsurvey1has revealed that buying an investment property is one way people are looking to take control of their financial future.

If youre thinking about investing in property, its important to understand how the process works as well as the potential benefits and the risks involved. Here are some of the things to consider before you get started.

Take The First Step To Property Investment

Whether youre a first-time or experienced investor, ooba Home Loans, South Africas leading home loan comparison service, can boost your chances of achieving a favourable deal by applying to multiple banks on your behalf, giving you the opportunity to compare deals.

They also provide a range of tools that can make the investment process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when youre ready, you can apply for a home loan.

Get a free home loan comparison

Multiple quotes from the big banks to compare.

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Approach A Private Lender

Otherwise known as angel investors these are private individuals who are willing to support your property investment. Of course, you dont just want to ask any random person to do this, it helps if there is a degree of trust. Either way, the private investor will need assurances that you are a worthy investment and that their reward will be worthy of the risk.

Federal Housing Administration Mortgage Loans

The Federal Housing Authority offers loan options with low down payments and low credit score requirements to make it easier to purchase properties. However, Federal Housing Administration loans are not intended to be used to finance rental properties since they must be owner-occupied. There are ways to get around this, but certain rules and regulations will need to be followed.

According to the FHA, the borrower must live in the property within 60 days of closing on the mortgage and for at least one year before considering renting it out. For a single-family property, youll need to prove youve lived there for a minimum of one year before you consider renting out your house.

On the other hand, if youre purchasing a multi-unit property, then you can still meet the requirements of occupying the property while allowing tenants to rent out the other units.

You can put down anywhere from 3.5% to 10% for an FHA loan, depending on what your current credit score is. Its important to note that if your down payment is less than 10%, you will need to invest in mortgage insurance to increase your chances of getting approved.

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Option : Hard Money Loans

A hard money loan is a short-term loan that is most suited to flipping an investment property as opposed to buying and holding it, renting it out, or developing on it.

While it is possible to use a hard money loan to purchase a property and then immediately pay off the hard money loan with a conventional loan, private money loan, or home equity loan, starting out with one of the other options is more convenient and cost effective if you are not intending to flip your property.

The upside of using a hard money loan to finance a house flip is that it may be easier to qualify for compared to a conventional loan. While lenders still consider things like credit and income, the primary focus is on the propertyâs profitability.

The homeâs estimated after-repair value is used to gauge whether youâll be able to repay the loan. Itâs also possible to get loan funding in a matter of days, rather than waiting weeks or months for a conventional mortgage closing.

The biggest drawback of using a fix-and-flip hard money loan is that it wonât come cheap. Interest rates for this kind of loan can go as high as 18%, depending on the lender, and your time frame for paying it back may be short. It is not uncommon for hard money loans to have terms lasting less than a year. Origination fees and closing costs may also be higher compared to conventional financing, which could chip away at returns.

What Rental Property Updates Have The Highest Roi

Whether youre dipping into your savings or taking out an rental property loan, putting money into fixing up your home can increase its value and your return if done correctly.

Before starting a renovation project, look at similar homes in your neighborhood to get a better understanding of the repairs needed to compete on your specific market. Higher-end neighborhoods will create higher expectations for amenities and fixtures, and vice versa make sure your renovation plans are appropriate for the neighborhood.

Start with the basics and do an analysis of the home in its entirety. If there are any structural issues, plumbing problems or insulation gaps or cracks, those will need to be addressed, and often at a steep price. These repairs are necessary, and delaying will only see them worsen and cost you more, exacerbated by loss of rental income.

On the flip side, making these repairs can keep your house at market value, or potentially bump you over depending on the scope of the market in your area.

Once necessary structural and mechanical repairs are taken care of, turn your attention to aesthetic updates that may be low cost, but high-value add. The first places you should look to are places renters spend the most time in, like the kitchen and bathroom. That doesnt mean buying a TV for your shower instead, look to update the look and feel of any rooms that feel dated.

On a budget, of course!

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Budgeting Tracking And Prioritizing

Start tracking all spending from monthly bills to eating out. If tracking reveals something daunting, look at the positive side: you now know how and where to make cuts. Donât forget about the new spending limit, if youâre really trying to put away a percentage of your income.

After tracking expenses, break them down into two lists: the essentials and inessentials. This will help highlight any extra, unnecessary costs you didnât notice before.

Just the other day, I went through my bank statement and saw that I was getting charged $13.00 every month. At that point, I remembered I had upgraded my subscription on a graphic design website, because I needed to use a paid feature only once, which is why I was getting charged every month since. Whether or not that is considered a significant amount of money, I havent used the site since the upgrade. So, I canceled my subscription and subsequently, am saving money. Its the little things like this that can make a difference.

Related: Best Places to Buy an Investment Property on a Budget

Owner Financing Or Seller Financing

Another way to finance properties is to have the homeowner be the bank.

The deal would be to have the homeowner hold the note against the property just like a bank would if they lent you money to buy the property.

If the seller is in a position where they can hold the note, you would negotiate with them the terms and interest rate just like you would with a bank.

Obviously the lender is the homeowner and would have his own requirements for you like: down payment, interest rate, terms, balloon payment, and other requirements that he may come up with.

It is only worthwhile to you as an investor to do owner financing if one of two things are true.

The seller owns the property free and clear, or the mortgage that he has on the property is an assignable loan.

The former is where the owner does not have any outstanding mortgages on the home and owns the property outright.

The latter is a loan that the owner can sign his rights and obligations over to you as the buyer and the mortgage company will now see you as the homeowner and note holder taking his place.

Its not advisable to purchase a home with owner financing if there is a mortgage on the property that cannot be assigned because most mortgages have a Due on Sale clause.

This is a way for the banks to protect themselves by calling in the note immediately when there is a change of ownership on the property.

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Different Ways To Purchase A Property With No Money Down

To purchase a property with no money down might seem like a too-good-to-be-true venture for most beginner real estate investors. There are, however, several methods and ways through which you can purchase a property with no money down.

Depending on your personal situation, there must be at least one method mentioned below that is applicable to you. We are certain that once youâve read all of them, at least one or two of these options will seem completely plausible for you, allowing you to purchase a property with no money down.

But before we jump into it, it is important to keep in mind that there is much more to a successful real estate deal than to simply purchase a property. Make sure youâve done your due research and that youâre certain about your choice to invest in a property.

So, if youâre a beginner real estate investor whoâs looking to purchase a property but does not have sufficient cash to finance the purchase, here are 10 different ways that you could use to purchase a property with no money down.

Dip Into Your Home Equity

Home equity refers to the portion of your home that you already own, or in other words, the portion of capital in your home loan that you have already paid off. Market forces can also affect home equity by raising the value of your home.

You can leverage your home equity for a loan, which you can then use to fund a second home loan for your investment property, or at least the deposit for that property. Over time, if all goes according to plan, the rental income on your investment property will enable you to pay off the loan. Bear in mind that there are tax implications as an investor if you choose this option, so best consult with your tax expert first.

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Nerships In Funding Deals

A partnership is like a loan from a private investor but instead of getting a monthly note payment, the investor gets equity in the deal.

That means the investor owns a portion of the property and likewise a portion of the income and expenses.

The equity stake the investor takes in the partnership is all negotiable and should be discussed when presenting the deal. The equity portions is usually based on the total cash invested from each party to the total cash invested as a whole for the deal.

The major benefit with a partnership is economies of scale.

All parties involved bringing money into the deal and can buy a larger building, apartment complex, or whatever type of deal you were going to purchase.

It is called synergy.

Synergy: The creation of a whole that is greater than the sum of its parts.

Ill give you an example from my experience with other investors I work with.

If each of three investor brings in $50,000 into the deal then we will have a total of $150,000 for the purchase.

On a commercial loan for an apartment complex the minimum down payment is 20% so the ability to buy a property work like this:

For an individual, $50,000 is 20% of $250,000 and can possibly by you a duplex or a triplex. With a partnership, $150,000 is 20% of $750,000 and can buy a small apartment complex with 15 or more units depending on the area.

How To Apply For An Investment Loan

Traditional lenders have strict eligibility criteria for investment loans. If you dont meet the banks criteria because youre self-employed or have previous credit issues, Pepper Money may be able to help. We help all sorts of people from those with irregular income – like the self employed, through to people who have previous credit issues. The process for applying for an investment loan with Pepper Money is simple. We encourage you to have a chat with one of our Lending Specialists, so we can understand your situation and find you the best possible solution. Its a good idea to have your documents on hand to help speed up the process:

• Most recent tax return / taxation notice
• Current letter of employment

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Capitalising Lmi To 97%

Some mortgage insurers no longer allow investors to borrow 95% plus LMI. Instead, their loans are limited to 95% including LMI.

Unfortunately, this increases the size of a deposit required by approximately 2%. For a $500,000 investment property this would mean that you need an additional $10,000 in savings.

However, some lenders have agreements with their mortgage insurers to still be able to lend up to 97% including the LMI premium.

Residential Investment Loan In Detail

Take a look at our Residential Property Investment Fact Sheet

Variable interest rate borrowers: Changes in the NatWest Bank base rate will affect the amount you need to pay to fully repay your loan. If you repay your loan from an account with NatWest or via Direct Debit, we will automatically adjust your repayments to reflect changes in the NatWest Bank base rate going forward . If you repay your loan via standing order from an externally banked account, we will be in touch to let you know the next steps required to adjust your repayments accordingly.

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Millions Of People Are Doing It So Can You

There are over 28 million real estate investors in America, and do you know why?

Saving money doesnt have to be hard. Decide what expenses are priorities, and find better, efficient ways to pay for them.

Best For Rehab Loans: Lendingone

LendingOne

Why We Chose It: LendingOne earns our nod for best rehab lender because they are one of the very few commercial lenders that make it easy to get a pre-approval letter, they finance up to 90% loan-to-cost and provide lower rates and fees than their competition.

• Pre-approval/proof of funds available online within minutes

• Founded by investors to improve upon traditional lenders limitations

• $175 charge for each draw

• Only available for one- to four-unit properties, no commercial

In 2014, Bill Green and Matthew Neisser founded LendingOne in response to their frustrations felt toward the difficult lending environment from rigid bank criteria and the easier, though more expensive, hard money alternatives.

As a direct private real estate lender, LendingOne has become the best rehab lender in the industry because they help investors get what had been missing in the market, such as pre-approval letters and proof of funds, higher leverage, and lower rates and fees.

LendingOne offers fix-and-flip and rehab-to-rent loan products. Down payments range from 10% to 20%. For rehab to rent, they have a 30-year fixed-rate loan as well as 5/1 and 7/1 ARM loans. Their fix-and-flip loans can finance up to 90% of your repair costs. Two years of interest only payments are an option on the fix-and-flip loans too. LendingOne loans on two- to four-unit properties only, including condos and townhouses.

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