How I Chose to Finance My First Rental Property

First, let's first define the most common ways that someone could finance a purchase.

• Conventional Loan
• Commercial Loan
• Hard/Private Money
• Cash (but that isn't financing)

Below are definitions of each of each of these.

When I started exploring investing it was 2017, I was fired from my career job in 2016 and just got out of all personal debt with my wife of 2 years at the time.

Next was to pay off the house and invest in the stock market. My gut told me no, but I couldn't identify why.

After researching real estate investing, the BRRR method seemed like a great no-lose deal but I didn't have the knowledge of renovations.

But I did buy a personal home in 2010 with a first-time buyer tax credit and rented out rooms to my college friends.  Ultimately that was my first rental property but I didn't even know it at the time. 

What that did give me was equity in my personal residence to use as a down payment on my first rental property purchase.  I bought a 4 plex and used my HELOC for the down payment.  The deal was so good it still cashflowed at 100% financing.   Looking back, every deal I bought was so good it would cashflow with 100% financing.  Am I proud of that, not really, to be honest, I should have bought more that didn't cashflow as well, but were still solid deals.  

I've since learned that a deal for me is a CRAZY good deal for most and I need to change my perspective on what is a deal.  Buying equity with little to no cash flow is still deal in 5 years.   

The ways to financing and how to explore those options...

    #1 Conventional Bank Loans

1. 1) Conforms to guidelines set by Fannie Mae- Not backed by the federal government
2. 2) Downpayment of 20% of the home's purchase price
   
3. 3) Your personal credit score and history determine your ability to get approved & your interest rate
   
4. 4) Lender's review borrower's income and assets
5. 5) Borrowers must be able to show that they can afford their existing mortgage and the monthly loan payments on the property
6. 6) Rental income is not factored into the debt-to-income calculations
7. 7) Most lenders expect borrowers to have 6 months of cash set aside to cover both mortgage obligations
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10. #2 Fix- and Flip Loans /Commercial( For some flipping houses allows for the owner to receive their profits in a lump sum when the house is sold rather than waiting on a rent check each month)
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12. 1) Short term loan- allows the borrower to complete he fixer upper and get it back on the market as soon as possible
13. 2) Hard Money Loans- the loan is secured by the property itself
14. 3) Easier to qualify for compared to a conventional loan- Primary focus is the property's profitability
15. 4) Possible to get this type of loan in a couple of days rather than waiting weeks or months for a conventional loan
16. 5) Interest rates are 18%+
17. 6) Terms of less than 1 year
18. 7) Origination Fees and Closing costs also tend to be higher
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20. #3 Tapping Home Equity
21. 1) Home Equity Loan / HELOC or cash- out refinance ( Drawing on your home equity
22. 2) Possible to borrow up to 80% of your home's equity value towards the property
23. • • • - HELOC- you can borrow against the equity the same as you would use a credit card and your monthly payments are often interest only
          • *Interest rate is variable and can increase as the prime rate increases
        • -Cash- Out
          • *Fixed interest rate- may extend the life of your existing mortgage
          • *Longer long term- paying more in interest

Investing in any property is a risky adventure, but finding the money to take advantage of an investment opportunity could lead to a big pay off. Keep in mind short and long term costs and how it can affect your bottom line investment.