The 5 Best Ways to Finance A Rental Property

As any experienced rental property investor will tell you, finding the right homes and apartments to purchase is only half the battle.

Securing the best possible financing plays just as big of a role in your long-term success. Make the wrong decision about how to secure a new property, and that mistake could greatly limit your potential for impressive returns.

Fortunately, learning how to finance a rental property comes down to knowing your five best options.

The 5 Most Popular Ways to Finance a Rental Property

No matter what kinds of goals you have for your real-estate portfolio, you’ll find an option below that allows you to finance a rental property in the way that makes the most sense for your unique needs.

1. Seller Financing

Whenever it’s available, seller financing is probably one of the best ways to pay for your new property. In short, this method involves the current owner of the property lending you the money you need to purchase it. Then, you pay them back just as you would if they were a traditional lender.

The major advantage of this approach is that you can often secure incredible terms. Sellers who enter into these agreements are much more accommodating because they’re getting their asking price plus interest.

Nonetheless, to finance a rental property this way, you need to find a seller who is willing to accept this kind of arrangement. Most just want their money right away, not to wait 5-20 years to turn a profit on their building finally.

2. Forming a Partnership

Another popular option is to partner with someone who has the money to finance the purchase of a rental property but lacks the kind of valuable knowledge you’ve gained over the years.

A common example of this type of arrangement is when one person puts up the money for a down payment, and the other agrees to handle all the duties of being a landlord.

However you and your partner decide to split up responsibilities, it’s vital that you form an LLC for your real estate holding, so that you have your terms spelled out in an operation agreement. This will make it very clear what each is meant to bring to the table and offer legal protection if either party falls short of their obligations.

3. Government Programs

Between the FHA (Federal Housing Administration) and FNMA (Federal National Mortgage Association), the government offers plenty of ways to finance a rental property.

We’ll discuss some of the limitations of an FNMA loan momentarily, but it should be noted that an FHA loan is only an option if you plan on living in the building you purchase. For example, you might use an FHA loan to buy a four-unit building and live in one of the units while collecting rent from three other tenants.

This kind of arrangement is extremely popular among first-time landlords. Your tenants essentially pay for your lease, giving you the opportunity to save money for another purchase.

4. A Self-Directed IRA

If you’re using a self-directed IRA to help plan for retirement, you should know that it can also be used to finance a rental property. These investment vehicles can be used to purchase assets other than stocks and mutual funds.

Among your improved options is real estate.

This is a great way to make the most of the money you’re setting aside for retirement, but obviously, it’s going to take a bit more work than leaving your money in stocks.

5. Utilize Blanket Loans to Purchase Numerous Properties at Once

The advantages of blanket loans have made them extremely popular among real estate investors.

For an investor who’s just starting out or only wants to add a single property to their portfolio, one of the above options may make perfect sense.

However, many veteran-investors are interested in aggressively growing their holdings, which means purchasing numerous properties at the same time. One of the best ways to do that is with a blanket loan because this single mortgage can cover multiple properties.

This means blanket loans are one of the most flexible ways to finance a rental property. After all, one investor may use this type of loan to purchase 5 properties while another could use it to purchase 12. As such, the terms involved are highly customizable, too, which is one more reason experienced investors have come to rely on them so much.

Finally, blanket loans are almost the sole domain of nonbank lenders, instead of traditional lenders. The reason this is important is because alternative lenders generally don’t have to play by the same rigid rules that traditional financial institutions do.

As a result, they’ll usually be much more likely to offer financing to someone who already owns multiple properties. On the other hand, traditional lenders will be much more hesitant about offering you additional mortgages after the first one or two. As we touched on above, FNMA loans come with limitations, too. Even though FNMA will approve up to 10 mortgages, that doesn’t necessarily guarantee a bank will want to offer as many.

So, for those looking to expand their portfolios by leaps and bounds, blanket mortgages are usually the only option.

Making the Right Choice When You Finance a Rental Property

Of all the factors that will affect its potential for returns, how you finance a rental property is actually right there at the top of the list. Make the wrong decision, and you may feel the need to limit your options or your returns will suffer because of a financial product’s unfavorable terms.

At Rental Home Financing, our goal is to offer experienced investors the types of financing products they need to continue adding to their portfolios. This includes blanket loans for those investors who want to add more than one property to their holdings at once.

If you’re currently in the market to grow your portfolio of rental properties, please contact us today to learn more about how we can help or simply apply online.