How to Finance an Investment Property
Many people over the past few years have wanted to jump on the train for real estate investing. Interest rates have been extremely low, which makes it cheaper to finance properties, and also increases the prices of the asset due to higher demand.
If you are seeking real estate as an additional investment vehicle you'll have to learn how to finance it. While using personal cash can be great at reducing risks and monthly overhead, it's very difficult to scale. Here's a few ways you can finance an investment property..
1. Savings- Using your personal cash is absolutely a way to purchase an investment property. This is great for people who do not want to take on debt, or investors who believe they can turn the property quickly, and get their cash back quickly as well. This is as easy as writing a check to the settlement company closing on the property, and receiving the keys to your investment property the seller is offering.
2. Bank Financing- Banks obviously are the lender most people think of for financing a home. There are a few ways to leverage debt through a bank, but the most common is 20% down. This is putting 20% of the value of the home down, and the bank will finance the remaining 80%. They generally want to have no more than 80% of the Loan to Value for the building.
3. Hard Money- This is becoming extremely popular as peer to peer lending has become a new industry over the past decade. These are generally companies that will offer loans on investment properties, without the underwriting at a bank. They are doing less underwriting, which means they are taking on more risk than the bank. This is why they charge a higher rate. Generally Pittsburgh investors will see rates around 14-15% as well as a few points to close on a property.
4. Private Financing- This financing is similar to hard money in that it requires very minimal underwriting, but instead of a company lending the money to several investors, this is generally an individual or friend or family with extra capital. These lenders will loan at lower rates normally around 10-12% and some don't even require any points to purchase the property.
Investing in Pittsburgh real estate requires debt in order to scale. That's the name of the game. It is extremely important to manage this debt properly. Getting over leveraged is the surest way to hit financial hardship. Construction is extremely expensive, and high risk. Take the worst case scenarios into consideration, before jumping into any project or committing to any loan. There are many options to select from in order to find what is the best fit for your personal finances, as well as what's best for any particular deal.
When done correctly, you can purchase many properties in a short period of time, and use small amounts of your own cash. As people see you successfully complete deals, they will be more willing to lend to your business as well.