10 Rental Property Financing Ideas from Pro Real Estate Investors

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9. Gap Funding

Mortgage loans and private lenders are all well and good, but sometimes you still have trouble meeting the down payment requirement.

If you get truly desperate for rental property financing, consider gap funding. In exchange for creative solutions — like you giving up partial ownership in the property — a gap lender will cover your down payment for you. It comes with high risk for the lender, so they don’t usually issue these loans without taking a stake in the rental property.

As a general rule, it only makes sense if you find an absolutely phenomenal deal that you just can’t get done any other way. But tuck it away as another creative financing idea for real estate investments.

 

10. Owner Financing

Been waiting patiently for owner financing to appear on the list?

Seller financing is one of those funding techniques that works great… when you can negotiate it. But you certainly can’t count on it.

Remember Nakeisha Turner, the single mom real estate investor who lives and invests in urban Baltimore? She finances many of her deals with seller financing. A specialty niche of hers is to speak with people in her target neighborhoods who inherit their parents’ properties free and clear, and who don’t have the money to renovate them.

(Wondering how she finds those deals? Try out off-market deal finder PropStream.)

Her offer goes something like this: “The property you inherited is sitting there collecting tax liens and vacancy fines from the City. I’m interested in turning it into a rental, and I can send you monthly payments, so the property becomes a source of income for you. What are your thoughts?”

When you’re negotiating with a seller, it doesn’t hurt to raise the question of owner financing. Broach the topic with the seller directly, rather than through an intermediary real estate agent. You’ll need to be able to explain exactly how owner financing works and what’s in it for them. Plus you’ll want to read the seller’s reaction to see if they could be open to it, or whether it’s a hard no.

 

Final Tips for How to Finance a Rental Property

Here are some recurring themes that came up again and again, as I interviewed professional real estate investors about their favorite financing for investment properties:

 

Create Long-Term Relationships with Lenders

Homeowners don’t need relationships with lenders, because they only work with one every few years at most. Investors do need strong relationships; their ability to buy new properties (and, you know, earn a living) depends on their ability to get financing.

With relationships come trust and speed – with a single phone call to the right investment property lender, a real estate investor can line up financing for a rental property or flip.

Alex Terauds, Partner and Director of Finance at the Connor Real Estate Group, recommends you “work with a mortgage broker that has significant experience doing deals similar to yours. It is important to get to know your lender first before committing. Choose your lender thinking about the long-term and not just the first deal.”

 

Have Several Lenders for Every Type of Real Estate Deal

Flip houses or use the BRRRR method? Build relationships with not one, but several fix-and-flip lenders.

The same is true for long-term rental property financing, for HELOCs, and so on.

You never know when one lender will say “No” to a deal, or why. Maybe they’re a local bank thin on capital that month. Maybe they don’t like the market where your next property is located.

Sometimes, an investment property lender just won’t like your deal for whatever reason, even if you think it’s a home run. (Although if a lender doesn’t like your deal, make sure you double check all your numbers and projections!)

Matthew Miller, owner of Stockpile Property Ventures, likes to keep several local lenders close. “Get approved with at least two local direct lenders. A good lender is a necessity for new investors when they are starting out.”

 

No Documented Income? Use DSCR Loans

Portfolio lenders don’t generally have income requirements or ask you to provide proof of income such as tax returns or bank statements. They don’t calculate debt-to-income ratios, unlike traditional financing and bank loans.

Instead, they calculate debt service coverage ratio (DSCR) to assess the property’s monthly cash flow. The formula looks like this:

DSCR loan formula

It’s a simple ratio of the monthly rent income to loan costs including principal, interest, property taxes, insurance, and any association fees. In other words, they want to make sure you’ll generate positive cash flow.

Don’t Spread Yourself Too Thin Financially

Real estate investors need to stay capitalized because they never know when a project will go over budget, or take three months longer than expected, or when a furnace will need replacing in a rental property.

“Don’t get into a project you are uncomfortable with or one that will spread you too thin financially,” recommends Matthew Miller. “Just because someone will give you a loan on a property doesn’t necessarily mean it’s a good deal! Have liquidity available to invest with or start wholesaling to build up your liquidity before doing a rehab project.”

 

Include Financing Costs in Your Profit & Expense Forecasts

It may sound obvious, but far too many new real estate investors underestimate the costs of financing investment properties. Not only do rental property loans usually come with points, but they’ll also charge “junk fees” and other closing costs, and may force you to use their (more expensive!) title company.

Which says nothing of the carrying costs, which investors should budget for at least three months longer than they plan. Renovation projects blow their timetables all… the… time.

Does your bridge lender charge an inspection fee to release draws? Include them in your budget!

“Make sure you take financing and processing costs into account when underwriting potential investment properties,” explains Scott Pollard of Houndstooth Capital Real Estate. “Also, be conservative on the time it takes to sell. It may be a hot market but baking in some extra time if anything unexpected happens is always a safe practice.”

 

What are your favorite ways to finance investment properties? Have a favorite lender or financing tip? Share them below!

 

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