Financing Your First Investment Property: What You Need to Know

Subject-to financing involves taking over a seller's existing mortgage without formally assuming it. While this might sound appealing, I don’t recommend this strategy for beginners due to the inherent risks.

Risks of Subject-To Financing:

• Loan Call: Lenders may call the loan due if they discover that the ownership has changed. This could leave you in a tough financial situation.
• Seller’s Financial Complications: If the seller faces financial issues, it can complicate your situation as you might not have control over the mortgage terms.

For a more in-depth discussion about these risks, check out this BiggerPockets episode that dives into the potential pitfalls of subject-to financing.

Bank Financing Options

Let’s focus on more reliable financing options available through banks. Here are three main types:

1. Conventional Investment Loans

Conventional loans are a popular choice for many investors. They typically require a 20-25% down payment, a solid credit score, and a manageable debt-to-income ratio. The benefits include:

• Stability: Fixed interest rates and long repayment periods provide a low-risk choice for financing.

2. Commercial Loans

Commercial loans are suitable for larger properties or multifamily units. While they may have different terms and higher down payment requirements, they can be a great option for serious investors.

3. Owner-Occupied Financing

If you plan to live in one unit while renting out others, consider these options:

• FHA Loans: These require a low down payment of 3.5% and are great for house hackers.
• VA Loans: Available for veterans and military personnel, these loans require no down payment and offer low interest rates.
• Conventional Owner-Occupied Loans: Similar to investment loans, these are designed for properties you’ll reside in.

Creative Financing Options

Next, let’s discuss some creative financing options that can help you secure your investment:

1. Hard Money Loans

These are short-term loans with higher interest rates, making them ideal for fix-and-flip projects. They offer quick access to capital but can be risky if not managed carefully.

2. Private Money Loans

Private money lenders lend based on the deal rather than your credit score. This can provide quicker access to funds, which is valuable in competitive real estate markets.

3. Seller Financing

In this arrangement, the seller acts as the lender. This can be beneficial if you’re unable to secure a traditional loan, but it's crucial to have clear terms to avoid complications down the road.

The Power of Partnership

Lastly, let’s talk about how a partner can make financing your first deal easier. Partnering with someone can help you overcome financial hurdles:

• Co-Signing: A partner with stronger credit can co-sign your loan, improving your chances of approval.
• Funding Down Payments or Rehab Costs: If you struggle to cover a 20-25% down payment or need funds for a rehab project, a partner can provide the necessary capital, making your investment journey smoother.

Conclusion

In summary, we’ve explored reliable bank financing options, creative financing methods, and the benefits of partnering with someone to ease your path to purchasing your first investment property.

I encourage you to research your financing options thoroughly, seek professional advice, and consider partnering with someone who can help you succeed in your first deal.

If you found this post helpful, please like, share, and comment below with any questions about financing your first investment property!