Need Capital for Your Rental Property Business? Here’s What You Can Use
Starting a career in the real estate industry is a smart move. Not only is the industry known for its lucrative nature, but there’s also a never-ending demand for properties that can be bought, sold, rented, or leased. Plus, anyone with a penchant for gaining a passive income source can thrive here.
However, the best thing about choosing the real estate industry over others is that you don’t have to have substantial wealth to become successful. You can start with a small capital and work your way towards building your wealth, which you can achieve through hard work, effort, and dedication.
So if you want to start a rental property business and earn regular passive income but don’t know where to get your funding, you’ve come to the right place. Here are five financing options that you can consider for your business:
The most common financing option for many people is through conventional loans. These are usually offered by traditional financial institutions, like banks or credit unions and mortgage brokers. Applying for conventional financing can be a wise move if you have a good credit score because you can take advantage of low-interest rates and fees.
You’ll need to provide a down payment that is around 3%, but that is still dependent on the kind of property you are planning to buy. Since conventional loans follow the guidelines of Fannie Mae and Freddie Mac, you’ll have to meet stringent requirements set by the government-sponsored enterprise.
Home Equity Loans (HELOCs)
If you already have a home before you plan to start your rental property business, there is a good chance that you can use the equity in your house as capital for the business. This can come in the form of lump-sum home equity loans or a home equity line of credit (HELOC), which can give you better borrowing terms and lower interest rates.
However, the catch here is that you’ll be putting your home on the line because it will serve as your collateral. If you default on your payments for the home equity loan or HELOC, your creditor can take your home as payment. So you have to be careful if you’re considering this option for your business.
Rental properties can be anything from single-family dwellings to multi-unit apartment buildings. If you’re planning to manage an apartment building, it might be better for you to go with multifamily financing. You may also need to house hack or live in one unit while you rent out the others.
This type of financing requires a lower credit score and will allow you to pay a lower down payment, at least when compared to conventional loans. But of course, you’ll need to find a credible multifamily lender that will approve your loan application first before anything.
Private Money Loans
If you have poor or low credit standing, your best bet might be to seek private lending institutions for a loan. Since they get their funding from private investors and organizations, their borrowing requirements are less stringent than traditional institutions. Also, they can be more flexible with their terms.
However, the catch here is that you might have to pay higher interest rates and fees because private creditors can forego checking your credit standing. This gives you a better chance of getting approved for the loan because the creditor will base your eligibility on your collateral, even if you have a poor credit score.
Although this is not a typical option for many entrepreneurs, it is possible to finance the rental property you’re hoping to acquire through the person selling it to you. This is known as seller financing or a purchase-money mortgage. However, this is only applicable to sellers who fully own their properties.
Seller financing is often available for properties that are hard to qualify for conventional loans or when the real estate market is in decline. The way this works is that instead of directing your monthly payments to the bank or private creditor, you will be sending your payments to the person who sold you the property.
Ultimately, the kind of financing that you should go with is the one that fits what you want for your startup. Choosing the wrong loan can make or break your business before it even starts, so take the time to weigh your options carefully. This way, when you finally decide, you’ll know that it’s a well-informed decision that you made for the sake of your future business.