There are very few people with the resources to finance their real estate investments. Most investors use leverage, the process of securing mortgages or loans to purchase a property.
The potential for a high return on investment in rental properties is a lucrative one. According to the Pew Research Center, 44.1 million households pay rent in the US. Tenants provide investors with realistic opportunities of meeting their loan commitments while enabling further real estate investments.
Starting Your Property Portfolio
The most standard method of financing your initial property investment is usually a regular mortgage. Borrowing through Fannie Mae or Freddie Mac is familiar territory dating back to the 1930s. The Federal Housing Finance Agency research indicates that 62% of mortgages are secured through government-backed ‘conforming’ loans with typically low-interest rates.
There are several types of loans for purchasing homes. You can eventually progress to borrowing from portfolio lenders despite their increased costs. Even your credit card can be used to make a substantial deposit. However, before taking unnecessary risks, there’s a great deal you can achieve if you remain with a conventional low-interest mortgage.
Become an Owner-Occupier and House Hacking
An easy way to begin your rental property empire is to house hack as an owner-occupier. The commitment for a Fannie Mae or Freddie Mac mortgage usually requires a minimal 3% deposit. By renting out a room or basement in your new home, you can often gain enough profit to cover your repayments. It’s similar to living there for free.
To make even more money from your initial investment, you could consider purchasing a multi-unit property. This provides several apartments, one for you and the others for different families to rent. It involves a higher degree of maintenance when you take on the management of a multi-family property. However, you don’t have to do everything yourself. There are many affordable facility management schemes to take care of daily tasks.
As usual, there are certain conditions to qualify for the owner-occupied loan. One of them is that you are obliged to live in the property for a minimum of one year. It’s entirely your choice whether you share your home during these twelve months. You’ll lose out on earning rental income if you wait to find tenants until you move to your next home. However, depending on the property’s condition, you might have no choice but to wait.
Investing in a Renovation Project
An ideal way to maximize your return on investment is to purchase a property in poor condition. It’s often known as property flipping or BRRRR, which stands for Buying, Rehabilitating, Refinancing, and Repeating. With the right skills, you can perform most of the renovation tasks yourself. Alternatively, take out a small loan to pay for professional assistance.
Once your distressed property is in top shape, you can rent to tenants. You then use the improved value of the refurbished property to secure a second mortgage. This is invested in another run-down home for you to repeat the entire BRRRR exercise all over again. According to Attom Data, at the close of 2021, property flipping had increased by 26% compared to the previous year.
Best Loans for Property Investment
By following the steps outlined above, you’re sure to have gained valuable experience in property investment. You might even be considering how to finance your fledgling property portfolio in a more dedicated manner.
As you may have discovered, a conventional loan can take a long time to process. Even the closing stages can last over two months. It also requires proof of income, which can delay your ambition of becoming financially independent through your property investments. Committed property investors often feel they can make greater progress by borrowing from portfolio lenders despite higher interest rates.
What is a Portfolio Loan?
As another type of mortgage, a portfolio loan is still subject to interest rates. These are usually set by the portfolio lender who retains the loan in its investment portfolio. In the long run, a portfolio loan can cost more in terms of repayments with high-interest rates of up to 9%.
In return for the additional expenditure, you may not have to explain your income or provide excessive documentation. It’s usually a much faster process, with your loan being finalized in just two weeks. Portfolio loans could help you quickly reach your target of earning a self-sufficient income through your property rentals.
The highest interest rates are usually connected to private agreements. This is where you negotiate your terms with a money lender. One advantage of this type of loan is the absence of costs and fees. It can help redirect your available funds, particularly in the case of property refurbishment. You might also find it easier to reach the required level of an initial deposit.
Your loan operates like one with a thirty-year limit, but in practice, you are usually obliged to reimburse the lender after just five years. This could mean you have to take out an alternative loan or sell the property. If your loan provider has a mortgage secured against your investment, you could have the option of buying the property itself.
Seeking a loan from individuals within your circle of friends and family can be an option. Some investors follow this route once they can demonstrate their competence in maximizing profit from at least five property investments. Many would-be participants in your money-raising scheme may also want reassurances involving costs for legal work.
Research conducted by Fortune.com has revealed that generally, a landlord can expect to make a clear profit of at least $10,000 once expenses have been deducted from a rental income. The more properties you rent out, the higher your level of income.
However, it’s how you finance your property portfolio that’s important. When starting, it’s wise to follow the conventional home-ownership route. You can gain considerably with a BRRRR refurbishment investment. Complex commitments such as a portfolio or private loans should be restricted to investors with a great deal of real estate experience.