Looking to finance a rental property

[Stephen Briggs]

It would be my first investment property and I am working with little money. What would be the best way to go about financing my first rental property? What are general qualifications?

[Fred T.]

That's a pretty open ended question, so here are some general qualification guidelines for you to consider:

1) Private Money

• Typically is not Credit Driven and depends heavily on the Deal itself, your ability to market the deal using factual data and a clear and concise exit strategy. Interest rates will be usually the lowest in this group between 6-9%, few (1-2) if any points and flexible terms. Typically these funds come from friends, family, co-workers, partners, etc...basically who you know. Closing times are the fastest...between 7-10 days on average. Best way to fund your Real Estate Deals. Private Lenders could lend up to 80%ARV and up to 100%LTC but use great care with Private Money...if the deal goes well, you made a friend...if you deal goes south, you're potentially out of the business.

2) Hard Money

• Most Expensive Money typically. Requires on average between 10-15% of your own funds plus closing and holding costs. Interest rates average between 12-16% and cost to borrow (points) range between 4-8%. Terms are stricter with usually 6-18mths and construction draws cost additional. Hard Money likes to see that you can service the loan and refinance out of their loan before the term expires, so they typically look at your credit as well. If your credit score is less than a 620, you may have to put more money down and the cost may be more overall. Closing times can be between 14-21 days on average. Hard Money lends on ARV most of the time usually between 65-80%ARV not to exceed on average 85-90%LTC.

3) Conventional Lending

• This is credit driven, typically requiring a 660FICO or better, you should have 6mths reserve funds, be able to cover the closing costs and rehab costs (with the exception of the 203k Loan Program or some other Construction to Perm Financing Program). The property must be insurable and your closing times are typically 45-60 days. It's the slowest process, requires good credit, good and strong PFS and requires cash down between 20-25% of the Purchase Price on average. If it's a rental property, these lenders like to see a DSCR of at least 1.25 on average. Conventional Lending does not look at ARV but instead AS-IS Valuation and your Purchase Agreement.

As far as actually answering your "What Funding Should I Use" question, I don't think anyone will tell you an exact answer to that. You need to be educated in whatever you are trying to do and know how the entire process works for most all types of funding. Each option has its advantages and disadvantages but the key to an Investor is Time vs Cost in most scenarios. Each Strategy has a better Solution then the other ones when it comes to funding.

You may also be able to use an Alternative Creative Funding solution of some sort like: Subject To, Lease Option, Master Lease, Seller Carry Back, Wrap Around, etc. These advanced strategies require extensive knowledge and a Team of Professionals around you to make them happen./

Good luck with your deal and Happy Investing!