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Financing Basics for First-Time Rental Property Owners

Investing in your first rental property is a big step, and financing the property is likely to be one of your biggest hurdles. If you don’t happen to have a mountain of cash waiting to be invested, here are some tips for securing financing for your new property.

rental property

1. Look at Online Lenders

Many of us think the local bank or national chain of banks is the only place to go for a loan. However, there are lots of options online that are not only trustworthy, but they might also be more convenient for you, too. You won’t have to spend a day driving from bank to bank, listening to prepared pitches, and answering the same questions. Instead, you can visit an online loan marketplace once, compare your options, and choose the one that’s right for you.

2. About That Mountain of Cash

While you may not need to be able to pay the entire purchase price in cash, the more you have saved up for a down payment and stored in your cash reserves, the better your financing options will be. Lenders find borrowers who manage to put down 25 percent less risky and may offer lower interest rates. Plus, some lenders may want to see that you have cash on hand to cover several months of expenses, from paying your personal bills to costs related to the rental, such as a property management company.

3. Unconventional Options

If you cannot get a loan from a bank or traditional lender, you’re not sunk yet. Seller financing is one option to pursue, as long as you have an attractive plan to show the seller. If you go this route, you’ll take ownership of the building and make monthly payments to the previous owner. Should you fail to make your payments, they get the building back.

Another option is to pursue investors. While you may prefer to work alone, securing your first property is likely to be the most difficult. Once you’ve proven yourself as an investor, you may have an easier time with subsequent loans. For that reason, working with one or more investors on your first property may be easier as you can put all pool your resources together to purchase the property, and the risk is spread out among the group as well.

Financing First

It may be tempting to shop around for a property before you’ve done your financing homework, but it’s best to face the numbers first. That way, you won’t have your heart set on a specific building and run the risk of having your emotions get in the way of making a sound business decision. There are also a lot of details to consider when securing your financing, and you don’t want to be rushed to make a deal before you’ve had the time to understand the terms and how those terms will impact your bottom line. When you start by exploring your financing options and have an idea of what’s available to you, you’ll be better prepared to make a smart choice when buying your first rental property.

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