When you decide to invest in a Roseville property, one of the first things you’ll have to work out is how you plan to pay for that acquisition. If you have a large sum of cash sitting around – problem solved. Most investors don’t have that kind of cash, however, and even if they did, they’d be more likely to leverage someone else’s money for their investment purpose, anyway.
Which brings us to the topic of today’s blog: how to finance your Roseville investment property. We’ll take a look at some of the most common options and the smartest strategies. The best choice for you will depend on a number of factors, including what you’re buying, how your financial position looks, and whether you’re leveraging any of your existing properties to increase your portfolio.
Here’s what we’re thinking.
The Conventional Mortgage: Taking Out a Home Loan
You’re probably familiar with the process of obtaining a conventional mortgage, especially if you own a home yourself and you took out a loan in order to purchase it. To qualify for a mortgage in order to purchase your investment property, you should be prepared to demonstrate:
- Good credit
- Funds for a down payment and closing costs
- Stable income
- Reasonable debt
Most lenders will look for a down payment of 20 percent unless you have exceptionally good credit or can demonstrate high income. Keep in mind that this type of loan will not take your potential rental income into consideration; you’re applying for the loan based on the strength of your current finances and income.
Borrowing Via Private Money Loans
There’s also the option of a private money loan, especially if you have connections within your network who are well-funded and looking to make an investment in you and your potential investment property. This type of loan will require you to borrow money from an individual. A friend or family member is usually a common choice for investors, but you can also borrow from an investment professional or a contact you made while exploring options for funding.
Loan terms will be dependent on the buyer and the lender. Watch out for predatory terms that raise red flags. You’ll want to have a solid contract in place that clearly outlines the terms of the loan, the repayment plan, and the contingencies. Don’t enter into an agreement like this without sound legal counsel or help from someone who has been through this process before.
Hard Money Loans for Roseville Real Estate Investments
Many investors have turned to hard money loans, which are short term loans that are ideal for buyers who want to pay off their loan quickly. If you’re looking to buy and flip a property, the hard money loan can be a good option. If you cannot qualify for the best terms through a conventional loan now, but you expect to in a year or two, you can use a hard money loan to bridge that gap.
You’ll still want to have a credit score and history as well as income that makes your hard money lender comfortable providing the loan, but the qualifications are usually not as strict as those for a conventional loan. A lot of lenders will be more interested in the profitability of the property and your ability to pay back the money in a short amount of time.
Interest rates are likely to be higher with hard money loans than with conventional lending products, which is another good reason to pay it off quickly.
Leveraging your Home Equity
Think about the property you already own and whether you can tap into the equity or leverage its value to fund the purchase of your next Roseville investment.
A home equity loan or a home equity line of credit are the two most common vehicles for investors who choose this method of financing for their acquisition. Those two options look like this:
- Home equity loan
A home equity loan offers you a lump sum of money that’s borrowed with an interest rate that is fixed but tends to be higher than the interest rate you’d get with a line of credit.
- Home equity line of credit (HELOC)
A HELOC provides you with only the cash that you need, and while the interest rate you get is likely to be lower, it can also fluctuate. The cost of your line of credit won’t be fixed.
Which is better when you are buying an investment property? It really depends. You’ll be able to get all the money you need at once with a home equity loan, but the HELOC gives you more flexibility when it comes to repayment and typically a lower interest rate.
Benefits to a 1031 Exchange
Are you looking to sell one property and buy another?
The 1031 exchange might be your best option in such a scenario. Not only will you be able to buy a new investment (or even more than one, depending on what you’re selling), but you’ll also be able to defer the capital gains taxes you might have to pay on the profit you earn from the property you sell.
There are specific timelines that need to be followed, and you’ll need to conduct this transaction through a qualified intermediary to satisfy IRS requirements and to ensure that none of the cash is put into your hands or your bank account.
This is not an option if you’re not planning to sell one investment property in order to buy another. You have to exchange like-kind properties, meaning one income-producing home for another. You can sell a rental property that’s a single-family home and buy two duplexes, or you can sell a condo and buy a single-family home. But, you cannot sell the property you occupy in order to exchange it for a rental investment.
There are many good ways to finance a Roseville investment property, and the best choice for you will always depend on your own financial situation, your investment goals, and your willingness to take on risk.
If you’d like to hear more about what we think would be best, please contact us at Action Properties. We’d be able to tell you what we think fits your situation well.
