The best ways to finance an income property

Buy a property to rent can be a profitable investment. Due to high costs, most buyers will have to fund some or all of this purchase. Still, buyers have several methods to fund an income property which each one has advantages and disadvantages that the buyer should understand before buying.

Bank Financing

The financing bank or credit union is a popular option to buy rental properties because most buyers are familiar with the process of your mortgage on your home. Still, guides loans for rental properties are more demanding than guidelines for lending to primary residences. Lenders typically require having a good credit score and have to make lower payments for income property loans. Interest rates for loans for rental properties are also higher than loans for primary residences, usually two percent.

Owner Financing

Not all rental property sellers are willing and able to offer financing, but if possible, buyers should carefully consider. Many buyers will be willing to finance the rental property at a lower interest rate than banks or credit unions. A strategy for buyers is to agree on financing the owner for a period of time until the buyer can achieve sufficient equity in the property to qualify for a bank loan with a lower rate. Buyers should consult with an attorney to ensure that the financing terms are written clearly and legally match.

Personal mortgage for home

Using the equity in a personal residence to fund or partially fund the purchase of a rental property can be an option for some buyers. A mortgage or a second mortgage on a home normally results in a lower rate of interest on the loan for rental property, but the mortgage also jeopardizes the personal residence. Shoppers should only consider this option if your current income will cover the costs of the mortgage even if the rental property does not produce income. This is important for the buyer to reduce the risk of losing your principal residence.

Private investors

Investor’s rental properties may also use private funds for rental properties. There are two basic ways to use investors to buy rental properties. The investor will simply may lend money to the buyer to purchase and charges interest on the loan. The investor can also become a co-signer of the rental property. The buyer and the investor will share the profits of their property. This will reduce the possibility of high returns for the rental property for the buyer but will reduce the cost to pay the interest on the loan.