How Do I Finance Rental Property?

Whenever the home-buying market takes a dive, more and more people are renting instead of buying, and so the market for those who want to become landlords and owners of rental property will boom. While investing in rental property takes time and money that not everyone has to spare, if you can do it, and if you do it properly, it can be a good, dependable way to make some income.

Most people are paying on their own homes already, and taking on a second mortgage for another house may be more of a financial burden than they can handle.

So, what are some answers to how do I finance rental property:

• Use your existing property as collateral or sell your existing property to buy a rental. This is often referred to as trade in and trade out
• Gather funds for a down payment and qualify for a mortgage on the rental property
• Look for commercial investors

Trade In and Trade Out

If you decide to use the trade-in and trade-out method, then you can use an existing property that you own. For example, if you own a house, you may have some equity in it. You can tap into the equity in that property and borrow against it to get the money to finance a new rental property.

You can also sell existing property you own and use the cash to buy a new home or rental property. In some cases, you can avoid paying taxes on the money from the sale of the property. For example, if you invest the money from the sale of the existing property into a new one right away, then this is referred to as a 1031 exchange and you may be able to use the money tax free. You should always check with a tax professional to make sure that your planned property sales qualify you for a 1031 exchange.

Find a Down Payment and Get a Mortgage

You can save up money for a down payment on the rental property and you can then apply for a mortgage. The more cash you have on hand, the better your odds of getting a lender to finance your rental property purchase. Good credit helps you qualify for a loan with a reasonable interest rate, as it does in every situation where a loan is involved, but a down payment is key.

The lender wants to know you’re truly invested in the property, so to speak. In fact, without the emotional ties that come with the purchase of a home for a family to live in, rental property sales are even more subject to the suspicions of lenders who may believe that a rental property owner may be less inclined to be vigilent about repaying the loan. You’ve got to show the lender that you know what you’re doing and are acting on a well thought-out plan which includes offering the largest down payment you can afford.

Finding Commercial Investors

If you think you've found a great rental property deal, then you can potentially find others who agree with you. Put together a business plan and approach people you know who might be willing to look into a real estate investment. If you get a few investors and everyone pools their cash, you may be able to buy the rental property with the combined cash.