Today I am sharing the six most common ways to finance real estate or rental property purchases in Memphis. We have a detailed PowerPoint presentation on this topic that we do during a class, and this is a summary of what we cover.
A traditional mortgage is usually a Fannie Mae or Freddie Mac mortgage. It’s similar to a home mortgage that you would get when buying your own home, but in this case you are using it for a rental property. This is pretty conventional financing.
Commercial Bank Loan
Most people aren’t as familiar with commercial bank loans. A community or regional bank will give you a business loan and they are essentially lending against your real estate as a business rather than a home. This isn’t a traditional mortgage with the usual 30 year fixed rate. The terms will probably be five to 20 years and the loan will come due sooner. It’s not fully amortizing over 30 years. The loan will balloon and you’ll have a final payment at three years or five years or 10 years. You can refinance it so the payment isn’t actually due, but the bank will reset the rate and reevaluate the situation. It’s a great tool that serves many investors well.
Hard money Loan
A hard money loan might come with a higher interest rate and the terms are a little more onerous. However, it’s all about the rental property. It won’t be as stringent as a traditional mortgage, and it’s a good way to buy a rental property.
Private Money Loan
The hard money and private money loans are very similar but they are nuanced. Private money loans are obtained when you know someone like a family member or a friend who can lend you money. They are lending to you as a person and not through a financial institution. It’s a personal loan and you’re getting a good rate from someone you know and trust. Not everyone knows people with deep pockets, but it’s a great tool if you can get it.
This is a new product that has become available since the market crashed and then began to rebuild. Brokers and investors discovered an underserved market – loans on rental houses. If you have three or five or 20 houses, and there is a total of $250,000 or $500,000 worth of mortgages you want on those properties, you’ll get a portfolio loan that covers all of them. These loans are not on individual houses but on the entire portfolio of properties. It’s a great option if you have multiple properties to finance.
Seller or Owner Financing
This is when the seller of the property takes back a note from the buyer. It’s like borrowing something from someone and paying them back in the future. Instead of borrowing money from the bank, you’re essentially borrowing the money from the seller. You’re then paying that seller back over time. This is an awesome tool if you can use it because it’s usually an easy way to obtain credit. There aren’t as many hoops to jump through as there are with other lenders.
These are the six most common ways to finance rental property. If you can get one of these loans or you want to explore them more in depth, please contact us at CrestCore Realty, and we can tell you more about them.