Investing in real estate for the first time can be an exciting beginning to a new chapter in your financial life. As you have likely heard, investing in rental properties is a great way to establish and grow real wealth.
Before you can make money on those real estate investments, however, you need some money to buy them. Unless you’re sitting on a nice pile of cash, you’ll have to finance your investment property. Doing this for the first time can feel overwhelming, but we’re here to help you navigate the process.
Traditional Bank Loans and Mortgages
Most first-time investors will go the traditional route, which is to finance an investment property through a traditional bank loan. If you already have a relationship in place with your bank, you’re at a strong starting point already. A broker can also help you evaluate different loans and mortgages from traditional banks to decide which one is going to be the best for your investment goals.
A traditional bank loan typically requires a down payment of at least 20 but sometimes up to 30 percent of the purchase price. You can expect a higher interest rate on an investment property loan compared to a residential mortgage.
Mortgage rates also happen to be higher right now thanks to the peaking interest rates.
However, a bank loan like this is one of the most secure financing options with a fixed interest rate and a predictable payment schedule. This is why it’s so popular with first-time investors. There’s ease and consistency and even a little guidance when you’re working with a great lender.
Considering Hard Money Loans
A hard money loan is money borrowed from a private investor or another lender. The money they lend is secured by the investment property you are purchasing. Unlike a traditional bank loan, hard money loans require a down payment of between 10 and 20 percent, which leaves you with more cash. However, there will be a higher interest rate on the money you borrow.
For first-time investors, this option is attractive because of the faster approval process. If you’re buying a property that does not qualify for a traditional bank loan, this is likely your next-best option.
Equity in Your Own Home
If you already own and occupy a home and real estate investing has been a serious goal of yours, you may be able to use a home equity loan to finance your investment property. This type of loan allows you to borrow against the equity in your home and typically has lower interest rates than other financing options. However, if you default on the loan, you run the risk of losing your home.
There are many different financing options available for your first investment property, and it is important to carefully consider each option before making a decision. You should evaluate the amount of capital you have, your credit score, and the type of property you are looking to purchase before deciding on a financing option.
When you take the time to research and carefully consider your options, you are more likely to make a smart investment and grow your wealth in the real estate market. Working with an expert in real estate investing is also a great idea, and that’s where we can help. Please contact us at PURE Property Management for any help with Sacramento investment properties.