The Options For Financing An Investment Property

Any time a decision is made to purchase property, whether this property is investment property or for your personal residence, the question of how you are going to pay for it is bound to arise, as it should. Property is probably the single largest investment that most people will make within their lifetime. Despite what the late night infomercial gurus claim, there really is no one size fits all solution for financing. Homes that are for sale for no money down are few and far between and most courthouses have been combed fruitlessly in search of those four hundred dollar (back tax) properties. So, unless you have happened upon the pot of gold at the end of the rainbow, you are going to need some sort of financing for your property.

If you are planning for this property to be an investment property, you have some unique financing options, or at the very least you are more likely to be able to enjoy some of the more creative alternatives to typical financing. Here are some of the options that would be available to you and why they may be a good idea for investment properties when they wouldn’t necessarily be wise choices for your residential property.

1) Adjustable rate mortgages. This type of financing allows you to make lower monthly notes for a specified period of time. The problem with these for a residential loan (more specifically long term loans) is that the interest rate rises at the end of the specified period. One would hope that for an investment property, it would have been sold for a profit by the time the higher interest rates kick in. These loans typically provide three to five years for the lower interest rate before rising. This gives you plenty of time to make repairs and improvements to the home before putting it on the market again. Hopefully you will have done your homework and chosen an area that has a fairly healthy real estate market so you don’t have to worry about the home being on the market for a long time. Remember, an empty house is not netting you any profit.

2) Balloon notes. This type of financing is something I would normally encourage anyone to think twice about. This allows you to live in the home (or work on the home) for a certain period of time, but at the end of the period there is a huge balloon payment. The bad news is that most people couldn’t possibly afford to make the final payment and as a result lose the home they have been working so hard for over the last five years. If you are absolutely certain that you can sell, flip, rehab and sell for a profit, or whatever you are planning to do with this home then I would recommend considering this (and this is the only occasion I would even entertain the idea of a balloon note) but it is an option.

3) Another thing you may consider if you are going to live in your investment property at all is buying a fixer upper and trying to get an FHA 203 (k) loan. This loan allows you to add the cost of repairs onto the amount you are borrowing. It even escrows the funds to go to the contractors upon completion of the work, just to keep some folks honest. It’s a good option if you have the credit worthiness and plan on living in the home you are investing in (even if only for a little while).

Hopefully, I have shed some light on the murky waters of investment property financing. It can be a rough river to navigate at times, but in the end, I feel it’s a worthy venture.