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Most Common ways to Finance A Rental Property



When you purchase your primary residence, your options for financing are more straightforward. This will be the place you live and call home for many years, so it’s acceptable to take out a 30-year mortgage. A rental property, on the other hand, is for the purpose of expanding your portfolio and earning money. Taking out a second mortgage may not be possible or sensible.


Let’s explore some of your options for financing a rental property. As you research these options, you can narrow down the ones that make sense for you.


FHA Loans


FHA loans are government-backed loans that only require a 3.5% down payment. However, these loans are only for owner-occupied properties, so you’ll have to be creative by renting out the home yourself first. Also, the FHA typically limits you to one FHA mortgage, and you have to pay PMI if you don’t put down 20%.


Conventional Mortgage


Most conventional mortgages for an investment property require a minimum down payment of 20%. Some may ask for more, especially if you have other rental properties. But if you qualify, these loans have some of the lowest interest rates. There are also many terms to choose from.


Hard Money Loans


Yes, you can buy long-term rental properties with hard money loans. Hard money comes from private lenders and individuals, and it offers a wide range of perks. For example, hard money requires no income verification, no credit references, quick turnaround times and the option to include rehab costs in the loan. The downside is that the interest rates are higher on these loans.


HELO or Home Equity Loan


A home equity line of credit (HELOC) works like a line of credit. The lender will use a property you already own as collateral. You’ll get a line amount and you can borrow money from this line. You are then billed monthly. However, not everyone is comfortable borrowing against their primary residence, and understandably so. If you can’t pay back the loan, you’ll lose your home.


Private Money


Private money is a loan that someone lends to you. It could be a friend, neighbor or investor. Even hard money lenders are considered private lenders. When you build up a good relationship with a private lender, it will be easier for you to borrow from them in the future. Most private lenders charge little interest as well.


Is there a ‘Best’ Option?


Each situation is unique, so you’ll have to consider your circumstances and what you are most comfortable doing. Overall, hard money loans are one of your better options because you can get funding quickly and easily, and also include rehab costs in the loan. This allows you to fix up the rental so you can charge your tenants more.

First Funding Loans is a hard money lender that works with real estate investors in NJ. If you’re planning to finance a rental property, give us a call and see how we can help you expand your portfolio.


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