Unlock Rental Property Profits Through Financing

Published by: Martin Signer, 3rd August 2024

Real estate investing is known to be a stable source of income that also comes with its fair share of risks. Thus, buying your first rental property can be scary, especially when there are so many financing options that can be confusing to people unfamiliar with what they mean. Thankfully, you don’t have to navigate rental property financing alone. Today, we’re exploring the best traditional and alternative options that can guarantee real estate profitability for a successful venture.

Traditional Financing Options

Conventional Mortgage

Keep it simple by opting for a conventional mortgage. If you’re considering venturing into real estate, one of the first funding sources that crossed your mind must have been a bank loan. However, conventional mortgages also include those backed by credit unions and mortgage companies.

 

Conventional mortgages are known as a great option that offers one of the most competitive rental rates since it is backed by the federal government. Additionally, it often requires no private insurance if your down payment is less than 20%. On the other hand, investors with bad credit scores may find it difficult to get approval for a conventional mortgage, as their income-to-debt ratio requirements are stricter than other options.

Portfolio Loans

Look into portfolio loans as a potential funding source if you're worried that your credit score is too low. Unlike other financing methods where the investor takes out a mortgage in their name, in this option, the lender keeps the mortgage on their books. In other words, while you may hold the ownership deed, the lender still retains control of the loan terms rather than selling it on the secondary market.

 

As a result, portfolio loans offer both parties more flexibility and eliminate the investors' concern about poor financial health. However, their interest rates are often higher compared to conventional loans, and you'll most likely have to drop a heavy down payment that can be as high as 30%.

 FHA Loans

Leverage government-backed loan options by applying for an FHA loan. Since this Federal Housing Administration scheme targets low- to moderate-income earners, it's the ideal funding source for investors with limited income and concerns about their credit scores. Besides, the down payment requirements are often as low as 3.5%, reducing the upfront cost of this financing method. Although an FHA loan gives financially limited investors access to competitive rates at low prices, there are often limits on the property's condition, making it ill-suited for high-risk opportunities. However, you can optimize your property by working with a rental manager in Northern Virginia to ensure maintenance needs are met.

VA Loans

Use your military background to your advantage by using a VA loan to fund your rental investment. After all, it's fair that veterans and other active military personnel can comfortably secure financing in exchange for their services. In some cases, your spouse can also sign on as a co-borrower, giving your family access to low-interest rates with no requirement for private mortgage insurance. Despite these perks, most vets and military personnel choose VA loans because they require no down payment. However, you still have to budget for a funding fee and can only invest in properties that meet the VA's standard.

Alternative Financing Options

Hard Money Loans

Opt for alternative financing when you plan to fund unconventional projects. Most traditional loans have strict policies on the properties that qualify for their loan, and this rule can be restrictive for high-risk investors. As a result, hard money loans are a popular option for individuals or companies that are into fix-and-flip projects. Besides, they’re backed by private lenders, making their approval process quicker even for investors with bad credit. On the flip side, their interest rates are higher compared to traditional loans and they’re only available for short-term projects lasting between a year to three years.

Seller Financing

Bypass all third parties in your transaction by paying the seller directly through seller financing. This option has one of the fastest closing processes because it allows buyers to negotiate and agree on loan terms without the interference of banks or private lenders. Thus, you can enjoy more flexible terms with a lower down payment and interest rate. However, this financing method is quite rare since sellers that can offer financing are limited. Still, it would be best to take note of market predictions to help debunk real estate myths, such as seller financing being too risky.

Crowdfunding

Open a go-fund to raise income for your next real estate venture when all else fails. Crowdfunding is an easily accessible option for small investors that want to participate in real estate deals, without the risk associated with conventional loans. In other words, crowdfunding allows investors to pool money together to fund real estate projects, giving each individual returns based on their contribution. Despite being one of the easiest options, this financing method can be tricky to navigate because its regulatory issues are more complex.

How Can Landlords Maintain a Healthy Cash Flow to Repay the Loan?

1.    Create a Budget

Monitor how much you spend each month on repairs, updates, and wages to get a full picture of your expenses. Every property owner needs to know what it costs to keep your rental running, as it can help you plan and allocate your resources effectively. For instance, if you have an empty unit, you'll have to spend more on marketing and advertising to attract a new tenant. However, once you have an occupant, it would be wiser to reallocate your marketing budget to more productive expenses like utilities, repair, and even legal fees to help with the rental agreement.

 

2.    Prioritize Regular Maintenance

Trim your monthly expenses by scheduling regular maintenance for your property. You’ll be surprised how much cash you can save in the long run if you hire professionals to inspect your wiring, plumbing, or roof before these systems develop major faults. This proactive approach also shows your tenants that you value their comfort, and are willing to ensure the property remains in good condition. Besides, preventative maintenance can also save you a lot of stress by reducing the amount of trips or calls you have to make in an emergency. After all, trying to get a hold of an electrician because of a broken HVAC in the middle of a heat wave would be a nightmare and cause severe inconvenience to your residents. 

 

3.    Invest in Quality Upgrades

Repay your loan quickly by investing in your property. It might sound counterintuitive to spend money on your rental when you're trying to cut down expenses, but with the right upgrades, you can save more money. Instead of calling the plumber to fix your leaky sink every month, switch to a modern low-flow model that consumes less water and requires fewer repairs. Another excellent idea is to swap your old appliances for their eco-friendly counterparts, which consume less power and also attract newer tenants. Thus, spending more money on specific upgrades can contribute to a healthier cash flow.

 

4.    Limit Vacancies

Fill up your rentals to ensure a consistent cash flow. Real estate experts recommend budgeting for at least two months of vacancy when setting your rental rate, and while that precaution can save you in the worst-case scenarios, you can still subvert it. Generally, property owners that use online platforms to their advantage can significantly boost their occupancy rates, and improve their cash flow. However, looking for ways to reduce your vacancy doesn't mean you should forego a thorough tenant screening. It could cost you more in the long run if you wind up with a difficult renter that doesn't pay rent or causes severe property damage. So be careful during the application process and settle for only high-quality tenants.

 

5.    Increase Your Rent

Create a net positive cash flow by increasing your rental rate. Sometimes landlords are hesitant to raise their prices out of fear of chasing away prospective tenants and existing renters, but this option isn't always feasible. After all, there's only so much cutting back you can do to reduce your rental expenses while ensuring it doesn't fall below standard. Thus, if your rental income barely exceeds your expenditure, your business could be running at a loss. That's why property owners must monitor current rental prices of similar prices in your area. Although it's important to set competitive rates, the last thing you want is to sell yourself short. In other words, doing your research and making reasonable increments can improve your cash flow.

Conclusion

Enjoy the benefits of stable and consistent profit by investing in the right financing. How you fund your first real estate project can be the difference between earning more money, and barely breaking even after making your monthly repayments. Thus, it would be best to research the different financing options and choose the method that aligns with your risk level, financial health, and real estate goals.

 

For instance, if you have a good credit score, you could easily qualify for a conventional mortgage. Additionally, if you're a vet or military personnel, you can use your status to get lower rates with no down-payment requirements. On the other hand, investors who prioritize speed would be better off seeking a hard money loan from a private lender or cutting out the middlemen through seller financing. There are several ways you can fund a real estate project, so take your time during the research phase to ensure you find the one that works for you.