Easy Methods For Investment Property Financing
Itâs always a good time to invest in real estate. No matter if you are working part-time or full-time, real estate investing can be a great way to generate positive cash flow and secure your future. Deciding to invest in a property is easy the hard part is investment property financing. For beginner real estate investors, money will always be a challenging hurdle and many will start to fear that investing in real estate is somewhat impossible for them. Donât worry, Iâve come to console you and share with you easy methods for investment property financing.
Hire A Property Manager
Being a landlord can be more time consuming than it might appear. Finding and screening tenants, collecting the rent, and taking care of repairs are only some of the duties required for successfully managing a rental property.
Owners also need to comply with local and state landlord-tenant laws, the Fair Housing Act, conduct periodic property inspections, run regular rent comparables, and obtain the best prices from qualified vendors to help keep operating expenses under control and rental property returns growing. New investors can learn how to be an effective investor and landlord by attending the Roofstock Academy— a training program specifically designed to help real estate investors succeed.
Those who are not interested in — or simply dont have the time to dedicate to being — a landlord often hire a local property manager. Hiring a property manager may allow an investor to enjoy the benefits of owning a rental property while avoiding the hassles of being a landlord. The best rental property managers take care of day-to-day details so that investors can focus on growing passive income streams by buying rental property in the best markets for the best returns.
You can find recommended property managers through Roofstock. All Roofstock Preferred Property Managers are carefully vetted to examine:
- Necessary license in good standing
- Historical portfolio performance
- Length of time in business
- Reporting and data capabilities
- Depreciation expense
Total Equity And Useable Equity
Banks will typically lend you 80% of the value of your home â less the debt you still owe against it. This is considered your useable equity.
Since the bank is lending you money against the value of your home, they wonât lend you the full amount. Put simply, if house prices dip, they donât want an outstanding loan thatâs worth more than your property.
Keep in mind that itâs possible to borrow more than 80% if you take out Lenders’ Mortgage Insurance .
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Understand Rental Property Returns
Return on investment is a financial metric that real estate investors use to help determine how potentially profitable an investment property might be. To calculate the ROI of a property, an investor needs to know:
- Estimate annual rental income — including tenant rent and additional income like pet rent
- Estimate annual operating expenses including repairs, property management fees, insurance, and taxes
- Forecast annual cash flow by subtracting expenses from income
- Determine down payment and other upfront cash
- Calculate ROI by dividing annual cash flow by the total amount of cash invested
For example, assume a rental property produces an annual rental income of $18,000, operating expenses are 50% of income, and the annual mortgage payment is $6,000 .
If an investor makes a down payment of $37,500 the ROI would be 8%:
- Annual cash flow = $18,000 rental income – $9,000 operating expenses – $6,000 mortgage payment = $3,000 before-tax cash flow
- ROI = Before-tax cash flow / Total investment
- $3,000 Before-tax cash flow / $37,500 Total investment = 8.0%
You can use the free rental property analyzer in this article to forecast the potential return of a property. Simply enter some information to view projected key return on investment metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
How To Buy Your First Rental Property In 202: 5 Simple Steps
According to Statistic, in 2019 there were 14.5 households and 44 million residents renting single-family houses in the U.S., and Urban.org is predicting there will be a 21% increase in new rental households between 2020 and 2040.
While investing in single-family rental property may often provide strong, stable cash flow, owning rental real estate can require a lot of time and hard work.
In this article, well discuss how to buy rental property in five steps, and explain some of the pros and cons of investing in real estate.
Key takeaways
- Five steps to becoming a landlord include obtaining financing, understanding rental property performance metrics, finding a rental property, tracking income and expenses, and, for some, hiring a property manager.
- Tips for buying a good rental property include investing for the long term, and choosing real estate markets with the best potential for rental property investments.
Looking to buy your first rental property in some of the hottest markets across the country? Check out Roofstock’s marketplace, the #1 platform for remote real estate investing. Supporting over $5B in total transactions, we have the resources to help you invest with confidence.
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What Are The Most Common Investment Property Loans
Investors try to use a conventional mortgage to buy a property with one to four units if they can meet the banks criteria because this is where theyll find the lowest rates and fees.
To buy a home to renovate and resell or lease, investors often turn to private lenders that specialize in this process. Many banks either wont provide these loans or take too long to close for an investors preference, so private money lenders are successful here.
Private and hard money lenders are also helpful when investors want to buy commercial properties like apartment complexes, medical office buildings, or office towers for example. Their terms are more flexible than conventional mortgages and they will work with borrowers who have lower credit scores where banks and credit unions may not.
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.
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You Should Not Be Scared By Diversification
Diversification is the name of the game. And just as you should diversify with all other types of investing, so it should be with rental real estate.
Even if rental properties are your primary investment, you should still have some money invested in other assets. This should include, first and foremost,bank investments for your cash cushion, but also financial assets, like stocks, bonds, and funds. They may perform well during times when your rental real estate isnt doing so well.
Costs To Own An Investment Property
Ongoing costs of investment properties include:
- council and water rates
- property management fees
- repairs and maintenance costs
Tax on your investment property
Although you may be able to claim tax deductions on expenses, you’ll still have to pay them up front. For positively geared investments, you may pay tax on your rental income.
Visit the Australian Taxation Office for how tax works for investment properties.
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Research Potential Tenants And Areas
The type of tenant you’re likely to find will depend on what kind of property you buy and where it’s located. If you go with a residential buy-to-let, make sure you know the kind of tenant you’re looking for.
If you want to rent to students, somewhere near college or university campuses makes sense. If you want professional tenants, go for a property with good transport links, or if you want to rent to families, look for family-friendly areas.
Being near large employers, good schools, shops and other amenities can also add value to a property.
You should also consider your long-term plans. Think about when you might want to sell the property and who might want to buy it.
Risks And Rewards Of Rental Property
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Income is passive and investors earn while working a regular job.
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If real estate values increase, the investment rises too.
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Rental income is not subject to Social Security tax.
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The interest you pay on an investment property loan may be tax-deductible.
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Real estate is a tangible physical asset.
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Maintenance costs or property management expenses can decrease rental income.
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Monthly rental income may not cover the total monthly mortgage loan payment.
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Real estate is not a liquid asset and takes time to sell.
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Entry and exit costs can be high.
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If a tenant moves out, a landlord still has to pay the monthly expenses.
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Option : Private Money Loans
Private money loans are loans from one individual to another. The source of most private money loans are usually from the friends and family of an investor. If you do not have friends or family in a position to loan money to you for an investment property purchase, a great place to start looking for private money lenders is by going to local real estate investment networking events. The popular real estate investment podcast BiggerPockets keeps a directory of local real estate investment clubs that you can join for networking.
Actual loan terms and interest rates on private money loans can vary significantly, from extremely favorable to predatory, depending on the relationship between the borrower and the lender. These loans are typically secured by some sort of legal contract that allows the lender to foreclose on the property if you default on payments. If you are new to real estate investing, consider carefully how your relationship with the person lending you private money may sour if you default before you sign an agreement with a loved one.
The Bottom Line: Get On The Path To Owning An Investment Property
Are you ready to take advantage of the benefits of real estate investing? If so, its time to research properties in your area. There are other ways to consider whether youre ready: Assess your financial stability and return on investment for a particular property, and decide whether you have time to manage a property. Youll also need to consider the housing market, property taxes and whether youd want to hire a property management company.
If youve carefully considered whether youre ready and would like to move forward with buying an investment property, the next step is to get your financing in order. Get approved with Rocket Mortgage and youll be on your way to purchasing your first investment property.
Get approved to buy a home.
Rocket Mortgage® lets you get to house hunting sooner.
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What Features Do Tenants Want In A Rental Property
When purchasing an investment property, you need to think like a tenant.
What you value and look for in a property as an investor may not necessarily be what tenants are looking for. The kind of tenant and demographic you target will largely depend on the location you buy in.
For example, if you invest in an apartment in the city, your target tenant is likely to be a young professional. What they are looking for in a rental property is going to be different than what a family looking for a rental in Perths outer suburbs are searching for.
Despite this, there are some key attributes to look for in an investment property that will help your rental stand out to tenants.
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.
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How Much Do I Need For A Down Payment On A Rental Property
Like most questions worth asking, the answer to this one is It depends. Specifically, it depends on the type of financing youre borrowing, it depends on your credit history, and it depends on how risky you look to lenders.
But thats not much of an answer, so heres a better one: between 15-30% of the purchase price of your next investment property . Where your down payment will fall in that range depends on what kind of loan you use to buy your next investment property.
Here’s Howfrom Buying Rental Property To Reits And More
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.
Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.
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Is A Real Estate Investment The Right Fit For You
First, you should think about whether owning investment properties makes sense for your financial situation. After all, its one thing to own a primary residence and something else entirely to invest in real estate.
Making financial decisions can be difficult, so you should consider multiple kinds of investments. After all, some financial products will pay off while others make take a hit from the current market environment.
As a result, diversification is an important part of investing. It might also make sense to own different kinds of properties so that you diversify your real estate portfolio as well if you decide to buy investment rental property.
Do Proper Due Dilligence
Property investment is a huge deal and should not be done without the proper research. You must also make sure you read between the lines and the fine print for every deal. Make sure you know how much the rehab will cost, what permits you need, and what the monthly holding costs are.
You also need to make sure you go and look at every property yourself before agreeing to buy it. Make sure it doesnt have any significant issues and if it does, make sure you are willing to be the one to fix them before you can resell or rent the property.
There is more to due diligence regarding real estate, though. First, you need to make sure you know the area. You should check that the areas market is strong and has the potential to find tenants easily. A good way to research an area is by visiting it yourself and looking online for the population and employment statistics.
If you have decided you like the area, you need to then make sure youre okay with the property. Inspect the HVAC, the water heater, the oil tank, and the furnace. You should also look for signs of mold. The best properties do not have any foundation or roofing issues.
You also need to learn about the seller. See how long the house has been on the market and why the seller wants to get rid of the house. You dont want homes that have been on the market for too long.
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