Real estate investors are not unicorns.
They do not possess superhuman traits, or clairvoyant, crystal-ball skills that allow them to make brilliant investments. Rather, they possess two main qualities: an ability to think big picture, and a dedication to thoroughly understanding the market. Part of this knowledge means knowing how to be savvy with your financing. Many different financing methods exist that allow you to turn ‘a little’ into ‘a lot’—spin straw into gold, as they say.
Investing in today’s market can be a wise decision, given the historically low rates, you just need to do some extensive planning. We listed some different financing methods below, so you can best put together the funds for your real estate investment.
Option #1: All cash.
One thing to debunk – an ‘all cash’ payment does not mean actual cash is used, but rather a check (like a cashier’s check).
If you have the means to purchase a property without any loan, this can be a great way to invest. Many investors choose this option because they can close quickly on a deal without having to wait for the banks approval on a loan. If you don’t have the funds to pay right away, then this doesn’t make much sense for you.
Option #2: Conventional mortgage.
This is the most common type of loan as it provides the lowest interest rates.
Here, you provide a cash down payment and then finance the rest with a traditional mortgage. It traditionally yields a bigger return on investment then purchasing in all cash. Instead of that large initial payment, you can break it up into two or three smaller portions for that cash down.
A traditional mortgage usually requires a 20% down payment, but it could go up to 30% for an investment property, depending on what lender is used.
Option #3: FHA loan.
FHA loans are used only for homeowners that will be living in the property, so this type of loan cannot be used in a home that you’re wanting to just rent out. There is an exception, though, if you want to invest in a duplex or triplex: you can live in one part of the home and rent out the other units. FHA loans require only 3.5% for a down payment, but with that, you will need to pay private mortgage insurance. This will slightly increase your monthly payment.
Option #4: Portfolio lending.
Some banks and credit unions have the option of lending property funds entirely on their own, which makes loan terms more flexible. Many times, investors will be see that there are less restrictions than conventional lenders, which makes it a desirable investment option.
Real estate investing is a lucrative yet demanding endeavor. Early legwork and financial savviness can yield huge profits for you. Start planning your investment now, and see where the road takes you!