There are many and varied means of financing an investment property, but usually, the question for a buyer is what is the best method of finance for their particular circumstances and which will provide the best return!
How to finance your property investment
- Traditional financing
This is a usual method of financing for a property investor, whereby a lender will accept the property you intend on purchasing as security for the loan. By this arrangement, you could benefit from a relatively low monthly financial commitment for the following 15-30 years. However, the majority of lenders will require a 20%-30% deposit. In many parts of the country, this could involve a significant sum, which often leads would be buyers to search further for their best way to finance a rental property. It is added to by you not being permitted to include “potential” rental income in your Debt-to-Income (DTI) assessment.
- Home Equity Loan (HELOC)
Another popular way to finance a rental property is the Home Equity Line of Credit type of financing. It becomes available in the event of a lender using an existing property, owned by you as security for a new loan. The facility functions similarly to a credit card, whereby the lender will provide you with a line amount, from which you can charge or borrow required funds. There is a monthly billing and a minimum payment, which is generally related to principal sum and interest. Whilst the lender will give you all of the funds upfront, you are required to make a determined payment every month. A “HELOC” or Home Equity Loan could be regarded as a streamlined version of a conventional mortgage.
- Cash-Out Refinance
This loan facility is also recognized as another best way to finance a rental property and is used when an existing property is used by a lender as loan security. The application procedure is the same as that for a regular mortgage and accordingly takes between 30-45 days to complete. Usually, funds are available to the value of up to 80% of your related home value, without issue. The cash-out refinance loan option discharges any existing debt on the property, thereafter creating a new mortgage, and providing you with the difference as a “cash-out”.
This type of lending facility, although seen by many as the best way to finance a rental property is subject to you personally being comfortable in utilizing the equity from an investment property you already own. Should the home not have been purchased within 6 months prior to the new loan application, the maximum cash-out is 75% LTV for a 1 unit property and 70% for a 2-4 unit property.