When it comes to financing real estate investments, you’re dealing with a different set of rules compared to buying your own home. If you’re just starting out in real estate investing, you likely don’t know what you don’t know. To help you navigate this, we’ve created a list of handy tips focused on financing your investment property.
Owning real estate is a solid investment. Not only do you benefit from property appreciation and rent from tenants, but you can also potentially use investment properties for a variety of tax benefits, too. Understanding the various methods of financing real estate investments can significantly enhance your investment strategy.
Real Estate Investing Strategies
Depending on your goals, you can use several different strategies to make the most out of your investment.
Short-Term or Vacation Rental
The popularity of renting vacation property (on a daily or weekly basis) has exploded in recent years. The concept of short-term rentals for less than six months at a time to snowbirds or longer vacationers has been around since, well, the Sunshine State.
Both of these shorter-term strategies can offer some of the highest returns on investment. Because of the lucrative advantage, you’ll also find the field very competitive, which also increases the risk of achieving your ROI goals. In addition, turnover costs and property management fees are much higher.
Long-Term Rental
Also known as buy-and-hold, this strategy involves buying an investment property and hiring an Orlando property management company. This offers a much more stable source of income with lower turnover costs and property management fees.
Owners use rent roll to pay down the mortgage over the years while the property appreciates in value. Ideally, your tenants help you pay off the loan on the house. That way, when you retire, you can use the cash flow for retirement income or sell it and get a bulk income.
Funding Your Investment Property
The traditional way of saving for a down payment on an investment property and obtaining a conventional loan doesn’t work for everyone. However, there are several alternate ways to obtain the means to fund your real estate investing adventure. Below are a few additional ways to make investing work in your budget.
House Hacking
Many real estate investors start off by purchasing a duplex (or greater). To save on their own living expenses, buyers live in one unit and rent out the others. This can cover all or most of the mortgage on the property. Purchasing a property that requires some renovations can lower the upfront costs.
This works well if the buyer is handy and can do any renovations, repairs, or maintenance work themselves. Many find the surplus provides them the extra funds to move out into their own residence and/or buy additional rental properties.
BRRRR Method
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. This strategy launched many new investor careers, especially during the historically low interest rate era. As market values hold, the appreciation rates continue to make this a viable option if you know how to time things right.
The trick is to find distressed and poorly maintained properties in the right areas. This way you can maximize your rent rates on a dirt cheap deal.
Getting Started
Ready to jump into the Central Florida real estate investment market? Sweet! Here are a few ways to foot the initial costs:
- Save for Down Payment
The down payment for an investment property loan is 20-25% of the actual cost. Depending on how quickly you can pull together those funds, this could take a long while or limit your borrowing abilities.
- Use Hard Money and Borrow Now
Hard money, or short-term loans, can help you raise the funds for the down payment right now. However, this tactic also comes with much higher interest rates on that short-term loan… plus you still have a mortgage to pay as well.
- Borrow the Down Payment
Some new investors decide to borrow the money from a friend or family member. This can be a great strategy to pull together the funds necessary in a hurry without the high interest rates associated with hard money. That said, many a relationship has been ruined over these casual loans if the terms are unclear or the giver suddenly needs the cash instead.
- Purchase a Primary Residence
Buying a primary home comes at a much lower point of entry, requiring as little as a 3.5% down payment. Using this tactic, you buy your home and live in the property for a year. This way you surpass the lender owner-occupied one-year requirement. After which time, you can move out and find renters to take your place (and pay your mortgage). This works if you can forego buying your dream house and can be patient through the wait period.
- Save Up the Entire Cost of the House
Walking into a closing with a briefcase of cash is the stuff of movies. Plus, it would feel damn good not to have to worry about covering a mortgage payment in between tenants. However, most financial investors will tell you if you’re saving up all those funds in a savings account, you’re likely missing out on massive amounts of return from the low interest rates. Chat up your friendly neighborhood advisor on this one.
- Inherit a House
Trick tactic. You actually can’t really plan for this one. Plus, inheriting a house usually happens when someone close to you dies. If you find yourself in this situation, we’re sorry for your loss. Your recently departed loved one has left you in a potentially financially advantageous situation though.
Bottom Line
Any of these are viable ways to finance your real estate investment. If you need help finding properties on the market in Central Florida or have a property to rent out, The Realty Medics can help! We can help you achieve your financial goals, regardless of which strategy you use. Call us today to learn how at 321-947-7653.
