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How Do I Finance Investment Property?

A common way to finance investment property is to secure a line of credit from a local bank.
Rental property is a good example of investment property.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 October 2014
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Many people create steady income by purchasing properties as short-term or long-term investments. In some cases, the plan is to acquire investment properties that will be held over a number of years and used to generate revenue; rental property is a good example of this type of investment property. At other times, the goal is to purchase properties that need renovation, invest funds in the renovation, and then sell the property at a profit. Both approaches are viable, especially when investors make use of sound methods to finance investment property ventures.

There are essentially three ways to finance investment property. One approach is to fund the purchase with your own resources. Essentially, this means you are underwriting the cost of acquisition yourself and not seeking any outside financing. Assuming you have plenty of money to commit to the venture, this approach offers the option of not having to go through the red tape involved with other financing strategies, or having to consult a partner on major decisions related to the property. However, funding the purchase of property investments on your own also places all the risk on your shoulders alone, and could put you on the fast track to bankruptcy.

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A more common way to finance investment property is to secure a line of credit from a local bank. The line of credit can be used to make the initial purchase and pay for any improvements or enhancements you make. If you purchased the holding in order to create a steady stream of income, you can repay the amount obtained from the line of credit as the money comes in each month. If the idea was to resell the property after making improvements (a process popularly known as “flipping”), you can pay off the line of credit at the time of the sale. This leaves your line of credit in place to use for another property flipping venture.

A third strategy that is used to finance investment property is to establish a partnership with one or more other investors. The advantage to this scenario is that you do not invest all your resources in the venture. At the same time, you get to share in the costs of renovation and the payment of any investment property taxes that come due while you and your partners own the property. This approach is very common with the acquisition of commercial investment properties, but can also be used effectively with residential property acquisition. As long as the partners have a positive working relationship, this can be one of the easiest and rewarding ways to go about making money with investment property.

There is no one right way to finance investment property. Choosing the best strategy depends on the resources you can commit to the venture, the amount of credit you can command, and the type of property you wish to acquire. In general, it is a good idea to look closely at the benefits and liabilities of all three of these approaches to financing, then go with the one that is most likely to produce the results desired.

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latte31
Post 3

@Moldova - I agree with you. I used to love watching those real estate shows in which the people on the show would flip properties for a living.

It was amazing how they did this, but the ones that made the most money were really organized and had a system for locating properties. They also had a team of contractors that would work round the clock to finish the projects.

What I learned from these shows is that you really have to have enough seed money in place because things can go wrong and delays will happen.This is where people get into trouble because the carrying costs of the property continue to mount while the renovation delays take place.

Moldova
Post 2

@Sneakers41 -I have heard of people doing that which allows 100% financing on the investment properties. A lot of those real estate infomercials talk about the no money down options and most of these purchases were financed on the equity of another property or they were purchased through lease options.

A lease options allows an investor to rent the property and even sublease it to someone else and at the end of the term the investor can buy the property for a set price that was agreed upon from the beginning of the lease and a portion of the rental payments will used for the down payment.

Usually people use lease options when they have trouble selling a home so these are very motivated sellers. The problem with lease options involves the current volatility of the housing market.

If you lock a price of your home so early in the lease, by the time your lease is up the home might be worth a lot less. Not only will this not make financial sense, but the bank will not finance the property because they will only finance a property for what it is worth.

sneakers41
Post 1

I wanted to say that I bought my first investment property by taking out an equity line of credit from my primary residence. My home was paid off so I only had one mortgage. I qualified for a traditional mortgage from the bank, but the bank would not finance the property because it was a condo unit in a building that had over a 20% foreclosure rate.

In addition, the building had less than 50% owner occupancy so the bank would not finance the property. Also, with the equity line there were no closing costs or prepayment penalties for paying off the loan. I would not suggest this route if you currently have a mortgage because having two mortgages is a little scary. I would suggest a regular investment property mortgage instead.

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