Managing investment properties is a great way to build wealth. If you already own one, adding another property can create another income stream. However, financing this purchase can be tricky. You want to obtain money for the property while maintaining or even building, your credit.
If you’re ready to take this leap, these are just some of the ways that you can responsibly finance a rental property.
1. Take Out A Home Loan
Applying for a mortgage is one of the most common ways that property owners finance their investments. This can be particularly effective if you have already paid off the mortgage on your own home or your first investment property. However, this home loan may look different than those in your past.
If you’ll be actively earning income from a rental property, you might choose a shorter-term loan and make higher payments. The security of future renters may also allow you to make a larger down payment. While you might be worried about what to do at the end of your loan's fixed term, remember that you can refinance, revert, or refix your loan to better suit your investment needs.
2. Use Your Home Equity
If you own multiple rental properties, you might use the home equity on one to buy another. For example, if you are paying off a vacation property that isn’t bringing in as much income as you wanted, you can use the equity from that home to buy a house in a more popular area.
Since you might not want to sell a property, you may also consider taking out a home equity line of credit. This is also known as a second mortgage and could help you afford a new investment.
3. Search For Unclaimed Money
Unclaimed money includes items like stocks, bonds, refunds, mutual funds, and paychecks that you never cashed. This cash from your past may be the key to your next rental property; you simply need to locate it.
Keep in mind that every state has its own laws regarding unclaimed money, but you can generally use online databases to search for assets that may be in your name. For example, Indiana unclaimed money generally shows up in newspapers and state records. You also have 25 years to locate unclaimed money in that state. So, be aware of your state’s laws before you search.
4. Open A Credit Card
If you are able to make some sort of down payment on a home but need additional help, a credit card could be a reasonable solution. Especially if you have exemplary credit, you should receive a high enough line of credit to make the payment. You can then pay back the amount quickly through rental income. However, it’s important to be careful when taking on credit card debt for large purchases, as interest accrues quickly.
5. Consider Owner Financing
While owner financing is not always a convenient payment method, it can be a viable alternative if other loans aren’t fitting your needs. In this situation, you would work with the current owner of the property to create a promissory note that outlines the lending terms. You would then pay the owner over time according to those terms.
Since you would work with an individual rather than a lending institution in this case, be sure to seek a lawyer’s advice before you sign the promissory note.
6. Seek Peer-To-Peer Lending
If you’ve established yourself as a trusted part of the real estate community, peer-to-peer lending might offer a way to obtain a quick loan. You generally find these types of loans online. Essentially, you would connect with an investor who is willing to create a nontraditional loan to make your project happen. This might be particularly appealing if you’re financing a construction project rather than buying an existing property.
With so many ways to finance your next investment property, you can certainly find a method that supports your goals. Just be sure to do your research, consult a financial advisor, and carefully weigh your decision. The planning will be worth it when you’re earning income from the new property.