Once you’ve reached a level of financial security that allows you to fulfill your daily needs and most of your wants, it may be time to purchase an investment property. Investment properties can provide you additional income through renovation and resale or as a lease property. Even if you don’t use the property for investment purposes, it can be a backup home for family members who need a place to stay for a while. Still, purchasing your own investment property is a big step. Here are some tips to help you finance it without breaking the bank.
BRRR stands for Buy, Rehab, Rent, Refinance. The basic idea is to find a good deal on property that needs work, buy it at a discount, then rehab / repair it to add value. Rent it, and then refinance to get capital back for other investments. Some investors will use hard money lenders to make the initial purchase, and once they get the property rehabbed and rented, refinance for better loan terms. It is often easier to get good loan terms when refinancing rented property.
There are many different types of loans available to help you buy an investment property. You can get a short-term loan that will allow you to renovate the property, flip it, and sell it for a higher value, with the investment property as collateral for the loan. Or, you can opt for a conventional loan from your local bank in the form of a mortgage. If you’re able to make the down payment, you can pay back the rest in monthly installments. Keep in mind that the Current Expected Credit Loss standard was issued by the Financial Accounting Standards Board (FASB) a few years ago. According the new standard, anticipated credit losses have to be estimated for the loan’s remaining period, instead of just calculating the credit losses that were actually incurred. CECL will affect your ability to be able to get a loan. If your credit isn’t high enough for you to be considered a prime borrower, you could face added difficulty securing a loan.
Rent to Own (Lease Option or Lease Purchase)
You could sign a rent to own contract with the property’s current owner. Rent to Own is often called Lease Option, or lease with the option to purchase. It can also be called a Lease Purchase, where some of the terms are pre-determined. A rent to own contract is an agreement in which you pay monthly lease payments, some of which are applied to the sale value of the home. You must exercise the purchase option before the option expires. This can be an easy way to gain control of a property with less money up front.
Use Your Home Equity
If you already own your home, you can take out a mortgage on the existing property and use the equity to purchase your investment property. This isn’t as risky as it might seem and is one of the benefits of being a homeowner. You can use your home equity to finance additional endeavors. Once the investment property becomes profitable, you’ll easily be able to put the money back into your home.
The rewards and perks of an investment property far outweigh the risks. There are many financing options of which you can take advantage to secure the benefits of this opportunity.
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