Creative Ways to Finance For a New Rental Unit

Taking on a rental unit is a great financial decision. You can use the money that you earn from tenants to help pay for the mortgage and earn equity over time, while also earning a bit and growing your own empire as time goes on.

For many people, coming up with financing for a rental unit can be the biggest challenge. They want to jump into the real estate market, but they do not have the money in cash to do it right away. The good news is that there are creative ways that you can use to finance a new rental unit whenever you are ready. Some of these include:

Use Current Equity

This method is not quite as creative as some of the others on the list, but it is a method that can help you get the money that you need for a new rental unit. If you already own another property, whether it is a rental property or a personal property, and it has some equity in it, you can use this as a way to pay for a new rental property.

Home equity is going to be determined based on the fair market value of the home, minus any of the balance of your mortgage or liens against the home. For example, if your home is worth $200,000 and you owe $120,000 to the mortgage company, you would have $80,000 in equity.

Keep in mind that most lenders who will do a home equity loan will only let you take out 80% of your equity at most. This means you would not get the full $80,000 in the example above, but it is still a good amount of money that you can use to finance the next purchase. Look into the interest rates and terms before you do this though.

Hard Money Loan

This is also known as a private mortgage and allows you to bypass some of the steps of the conventional loan. Sometimes you can qualify in 72 hours or less and can be a good option for those who have bad credit or other issues that make a traditional mortgage difficult.

The main reason that these can be bad is that the interest rates are high. While current mortgage rates are close to 5%, these hard money loans can have interest rates between 10 to 15%. You need to do all of the math ahead of time to see whether this type of loan makes financial sense for your needs.

Find Investment Partners

One way that you can finance your rental properties is to go in with a partner. Providing more flexibility, more financial backing, and knowledge of another in this industry can make financing the property a bit easier. When you do this type of investment, your name will not go on the mortgage agreement. This can make it a good option if you have hit your lending limit.

There are no limits to who you can do investing with. You can choose a business colleague, a friend, or a family member. You will need to set up some kind of business agreement before you start to ensure that things are fair and everyone is on the same page from the start. Pick your partner wisely because this is a new business you are starting together.

Seller-Second

This is a method of financing that can be done quite a bit and is helpful for anyone who would like to invest. It is best for those investors who may not be able to qualify for the entire amount of the loan or those who have a smaller down payment that could cause some problems.

What the seller-second option means is that the seller of the property is going to provide a second mortgage on the property. This is going to be enough to cover most, if not all, of the down payment that is necessary for the approval of the loan.

The one key point here to check before jumping is to make sure that the loan you qualify for will allow a second mortgage in the first place. Most loans will allow this, but there are some that do not. If this is the case, you can’t choose this option or you will lose out on the primary deal you are trying to do.

Lease Option

Another popular financing option that you can choose is known as the lease option. This is going to allow you to get a property with little to no down payment. It also gives you the option to buy the house later on if you would like, usually within two to three years. You may be able to get a longer or shorter term.

This is a good option if you need to have some time to get your affairs in order to get financing. You will pay the seller during that time and any money will go to the purchase price of the home as well. You can run and own the property, but it helps give you time to come up with the down payment or find the right financing if you struggle with that at the moment.

This one can be an effective option, but most sellers do not want to do this method. They will have to take on a good amount of risk to make this happen and they would rather offload the property at that time and not have to deal with it any longer. You will have to search around for a bit to find a seller who is willing to go with this option.

Choosing a Way to Finance Your Rental Unit

There are different methods that you can use to help finance a new rental unit. You need to shop around and look at several options to help you find the method that makes the most sense for your situation.

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