Andrew Carnegie was once quoted in saying, “90% of all millionaires become so through owning real estate.” Known for leading the American-based steel industry during the 19th century, Carnegie was considered to be one of the richest people in American history.
His net worth has been estimated at $372 billion dollars.
Despite having passed away at the age of 83 in August of 1919, real estate professionals claim that his statement regarding riches and real estate still hold true today.
If you are reading this, chances are, you do not have the same degree of wealth that Carnegie possessed, but you do have his entrepreneurial spirit! Continue reading for a few solid steps on how to succeed in financing a rental property.
The Elements of Investment
As a real estate investor, you must have set out clear and defined goals. To date, there are three main elements of investment. These are time, the amount that you want to purchase, and the type of property. You must determine how long you intend on holding a particular property to develop a sound financing strategy.
You should then outline how many units you want to purchase for the purpose and intent of building your portfolio and generating profits. You should then make a decision about the types of property you will purchase.
In terms of revenue, it is best to opt for single-family units, multifamily units, and/or commercial properties.
There are a total of three secondary elements that should be considered when attempting to engage in the process of financing a rental property. These are the costs of the funds that are borrowed, the loan period, and the amount of the money that is borrowed. To get the most “bang for your buck”, you must consider the following:
- Costs of Borrowed Funds – When considering financing a rental property, it is imperative that you consider the interest rate that you will be charged for borrowing money. The goal to income-producing properties is to ensure that you make the most money possible. As a result of this goal, you will want to opt for funding that carries the absolute lowest interest rate. Remember, it is perfectly acceptable to negotiate rates with lenders.
- Period of the Loan – When you obtain a loan for financing a real estate property, you will be provided with an amortization schedule. This shows the payments that will be necessary for the life of the loan. It will break down how much is going towards the principal and how much is being paid towards interest. If you have a short schedule, the payment will be higher. If you have a long schedule, the payment will be lower. It is often best to opt for a longer schedule so that you can pay higher amounts during periods when your rental property has occupants and cover yourself for periods when it does not.
- Amount Borrowed – When financing a rental property, you are financing an investment. You want to start making money as quickly as possible. Based on this concept, you should focus on borrowing more and putting down less. You must focus on leverage. Remember, in terms of real estate, the greater amount of property borrowed will render a higher return on the equity of the property. This is based on the OPM Principle, or “Other People’s Money” Principle. In short, by increasing the amount that you borrow and decreasing the amount that you invest, you have the ability to earn a much higher rate of return when it comes to your invested funds.
The “No Money Down” Method of Financing a Rental Property
In most instances of acquiring funds, you either have to have financial backing or a certain type of credit score; however, in terms of financing a rental property, this may not always be the case. It involves using the financial resources that others possess in order to save the financial resources that you have. In short, the “no money down” does involve putting money down – just not money of your own. The following steps outline how you may indulge in this type of financing:
- If you have a good credit score and an optimal personal lending history, you may be able to finance the entire price of the rental property that you wish to purchase. Now, this may mean higher monthly payments and/or higher interest rates on your loan, but it will help you get “in” the market without having to take “out” of the money you currently possess.
- The next step that will allow you in the rental property niche without having any money down is to do an assignment of contract with the current mortgage owner of the property in which you have an interest. This allows you to take over the payments of the current mortgage on the property. It requires an agreement between you and the current possessor of the mortgage.
- You may also create an installment plan in order to obtain a rental property. This allows you to pay off what was wanted for the down payment to the owner over a set period of time instead of paying it all down at once. Basically, it boils down to property first and paying later.
- Partnership – If you know someone that has the financial means to put up a down payment, you could develop a partnership where you pay back your “half” over time.
- Rent-To-Own – Next, you could rent a property with the intent to own. After the designated time frame, you could then opt to buy by putting money down or attempting to get a loan that helps you acquire the property as your own.
For more information on financing a rental property with no money down, click HERE.
If you have an interest in financing a rental property, it is important that you consider the advantages and disadvantages associated with different types of property. They are as follows:
- Single Family Units – These types of units are considered to be the most stable and the most popular when it comes to the classes of rental properties. These have the advantages of being lender-friendly and very easy to valuate. Those that rent these types of homes tend to stay longer and there is less risk. The disadvantages include higher maintenance costs and lower levels of cash flow.
- Duplexes – This are popular due to the fact that it is possible to use some units for expenses and some for profits. Additionally, the owner may reside in one of the units. The disadvantage is that most people in search of a home will not purchase these; however, if you keep them rented, your profits can double, easily.
- Multifamily Units – These are referred to as “triplexes” and “quads”. Many have more than 3 or 4 units. Those over 4 are considered to be commercial properties. This involves a different type of underwriting process; however, it can be relatively simply to obtain a loan to purchase a multifamily complex. The disadvantages include higher maintenance costs and higher amounts of restrictions on the usage of the property.
Is it Better to Finance or Pay Cash?
Ultimately, it is best for a rental property investor to choose financing rather than paying all cash.
Today, lenders have relatively low rates. The low rates mean that you do not have such a high level of initial expense. If you have a lower reserve of cash, financing is the better option as it will allow you the opportunity to succeed in your professional real estate endeavors.
In the grand scheme of things, financing allows you the opportunity to utilize leverage in order to create a profitable real estate empire.
The Benefit of a Private Money Lender
When financing a rental property, it may be in your best interest to locate a private money lender. This can be a person or a company that engages in the act of investing their money into properties as either an equity partner or as a debt investor.
All of the rates associated with monies, the terms of the investment, and other aspects of the deal are considered to be highly negotiable. While many may consider a borrower’s credit history, most prefer a potentially profitable deal to a high credit score.
You may find private lenders in and around your community, through property management agencies, banks, and online.
Are you ready to start working in the real estate market? If so, you need an investment property. We here at Pioneer can help you learn more about financing a rental property, finding suitable properties, and handling the day-to-day responsibilities of your newly-chosen career. Rental properties provide a suitable opportunity for generating a massive amount of wealth. There are various types of properties that you may choose from and a multitude of profitable neighborhoods.
For more information on financing a rental property and/or managing your properties, contact us today by calling: