Investment properties have that name for a reason—you must put your time and money into that property to see a material result. Many investors, especially those investing for the first time, don’t have the hard cash to pay for an investment property out of pocket. You must secure financing to pay for an investment property—but how? Let’s take a look at a few different funding options to help you finance your first investment property.
A traditional loan, or a conventional loan, is a loan that the government does not insure. Rather, a private lender, such as a bank or credit union, provides it. Typically, these loans have rather low-interest rates, making them a good option for first-time investors. However, the application process is lengthy, and you must have a very good credit score to qualify. At a minimum, your credit score should be within the 600s, and you must have a down payment of at least five percent of the purchase price.
A Federal Housing Administration (FHA) loan is the opposite of a traditional loan, as a government body backs it. Typically, it’s much easier to apply and qualify for, as the down payments and required credit scores are typically lower. However, much like other government-backed loans, the property must meet certain standards, and an appraiser will likely analyze it first. Additionally, you need to be aware of what your loan’s APR is. The interest rate might be lower, but what you pay in APR fees may cost you a pretty penny in the long run.
Hard Money Loans
Hard money loans are a type of loan an alternate lender provides, such as a private company or individual investor. While the government does not back these loans, the application process is much faster, and they’re more willing to overlook lower credit scores. However, this leniency is because they’ll use the property you’re purchasing as a form of collateral. While this is a much faster option than traditional loans, as the repayment period is much shorter, the interest rates and down payments are typically much higher.
In truth, a myriad of ways to finance your first investment property exist, but these strategies are the most common and popular funding options for first-time investors. Additionally, it’s important to note that all loan types will come with their set of pros and cons. Which one you choose simply depends on what you’re comfortable with and the assets available to you.