First rental- which loan?

[Peter Dalton]

I am looking to buy my first rental property in the next 0 to 3 months. There’s a great market here for houses in the $60,000 range. I’ve run all the numbers through the calculator and I think I can be $300 cash flow positive if I do this. I don’t have the 20% to put down for the down payment so what would you recommend? A hard money loan for the down payment and then a mortgage for the rest or would you just get out a $60,000 loan and buy the house for cash so to speak? Any and all advice welcome.

[Ruth Lyons]

Hi Peter, Here's a complete list of financing to consider all your possible options. Ruth Lyons

 Conventional Mortgage -- A conventional mortgage is a common loan for rental property investors who buy-and-hold for monthly cash flow and long term appreciation. Your local bank or a larger financial institution is a good source for conventional financing at competitive rates. The better your credit score and financial position, the better rate you’ll qualify for. Most lenders limit the number of conventional loans to individual investors to 10. Beyond that, you’ll want to look into a portfolio lender.

FHA Mortgage -- This is a loan insured by the Federal Housing Administration. It's intended to help first time buyers break into home ownership by lowering the downpayment needed. FHA loans are a rarer choice for real estate investors because loan approval is only given if the borrower intends to live in the home. This is great for newbie investors who are going to "house hack", which is the industry term for buying an investment property to live in with roommates whose rental payments cover most or all of the mortgage payment and ownership costs.

203K Loan -- A 203K loan is a form of FHA financing designed to allow a homeowner to purchase a home that's a fixer upper or in need of some work. The lender finances the purchase price and the cost of repairs by building both into the loan. Like FHA, these loans are only available for owner-occupied properties.

Home Equity Loans and Lines of Credit -- If you have equity in your primary residence, banks and other lending institutions will allow you to borrow money against that equity through the use of a home equity loan or line of credit. The interest rates are typically 1 percentage point above prime if you have good credit and typically you can borrow up to 90% of the value of your home. So, let's say your home is worth $500,000, you have a first mortgage with a balance of $250,000 and you'd like to borrow against your equity to buy an investment property. The lender would approve you for a $200,000 line of credit ($500,000 x 90% - $250,000 already owed). I use my HELOC regularly to make cash offers on investment properties--it provides the most hassle-free access to ready cash.

Hard Money -- Hard money loans are a form of private loans in that the funding is provided by private lenders, rather than government-regulated financial institutions. Hard money loans are short-term loans typically used to: (1) finance fix-and-flip deals where the goal is to quickly get your money back and repay the loan, or (2) bridge the gap between an investment property purchase and longer-term financing. The interest rates are high and the qualification is must less stringent than institutional financing

Self-Directed IRA (SDIRA) -- This is a special type of IRA account that allows the owner to invest in a broad range of investments beyond the typical stocks and bonds. By going through an account trustee or custodian, you can invest retirement-qualified savings into real estate, precious metals and other "alternative investments". Transferring my 401K into a SDIRA is how I bought my first three investment properties. It's an excellent source of funding if you have a sizeable IRA and you follow all the rules. You can even leverage your portfolio through the use of non-recourse loans against investment properties held by your SDIRA.

Private Money -- Sometimes referred to as “the bank of mom and dad”, private money often comes from family, friends, acquaintances, and high net worth individuals looking to achieve higher returns on their cash than a traditional bank offers. There are no hard and fast rules that define the terms of the loan. Private money lenders will expect a return on their investment comiserate with the perceived risk. You might turn to private money if you believe you can raise the value of a property and return the capital with interest in a short period of time.

Partnerships -- Two are better than one, right? If the acquisition and rehab costs are beyond your scope, you can consider bringing in an equity partner to help finance the deal. While the partnership can be structured however agreed upon, it’s typical that a partner is given an ownership percentage of the project’s return on investment. Of course, there are advantages and disadvantages of working with a partner which you’ll want to consider carefully before jumping in.

Portfolio Lenders -- Conventional loans have strict underwriting guidelines and it can be difficult for real estate investors and the self-employed to qualify as borrowers. Many credit unions and some banks offer portfolio loans with more flexible terms and less strict qualifying standards. The interest rate can be even more favorable than having a bunch of one-property loans but not all banks offer these and you’ll want to carefully compare terms and rates among several portfolio lenders.

Seller/Owner Financing -- It’s possible that, if the seller owns the property outright, they will finance the property for you. You would simply make the payments to them instead of a financial institution. If the seller has a mortgage on the property, that loan must be paid back in full before title can change hands, unless there’s a clause that you can assume their loan. Every home is unique so every owner financing agreement is unique. The specific terms (interest rate, downpayment, etc) of how seller financing would work out and whether it is feasible or desireable are open to negotiation.

Life Insurance Loan -- If you have a permanent or whole life policy, you can borrow against the policy’s value, typically up to 90%. The insurance company uses the polivy as collateral for the loan. I borrowed against the cash built-up in my whole life policy to fund the rehab of one of my buy and hold properties. I was pleasantly surprised at the benefits of this type of financing: It’s easy and quick to get funds as there’s no underwriting process to qualify for. The amount borrowed doesn’t show up anywhere in your credit so it has no effect on your debt to equity ratio. You don’t need to make payments. Interest accrues each month but there’s no repayment schedule you need to adhere to. Interest rate is very competitive, typically a percentage above prime.

Crowdfunding -- Crowdfunding is a way of financing small amounts of capital from a large number of individuals. There are a number of crowdfunding platforms that loan money to real estate investors. Crowdfunding platforms including Roofstock, Patch of Land and Sharestates, Fund That Flip loan money to residential and commercial real estate rehab investors. You can also check out peer-to-peer lending platforms, such as Fundrise and RealtyMogul, to name a few.