5 non-conventional ways to finance your rental properties

By on July 1, 2015

Finance is one of the biggest obstacles we encounter in our efforts to help hundreds of real estate investors each year buy rental properties.

We all know how to do a conventional loan, which is the product that is still most often used.

However, the needs of the different investors vary, and not every investor fits into the “cookie-cutter” mold of a conventional loan.

There are five different loan products that I have used either personally or helped clients obtain. When searching for financing, you should consider these questions:

  • What type of lender will finance the type of property you are looking to purchase?
  • How will your creditworthiness affect the loan?
  • How will this loan affect your creditworthiness for future investment loans?

5 non-conventional sources to finance your rental properties

1. Angel investors (also known as private money lenders)

Today’s uncertain markets have everyone wanting to have their investment dollars secured by a tangible asset. As we all know, real estate is that preferred asset, as it provides for great returns and people will always need a place to live.
While most everyone wants their investment secured by real estate, not all people are interested in buying property and dealing with the fix and flips or the property management of rentals.

These are the people who simply like to invest like the banks invest. They lend money to people who want to do this, and they secure their interest with a lien to your investment property.

For example, I have one investor in the Tampa area who loves to buy apartment buildings with other people’s money. This gentleman knows many people in the professional sports world. These people make lots of money. They know they have limited years to make these big seven-figure incomes, so they are thrilled to partner with someone who wants to buy and manage properties.

They receive a fixed rate of return each month and, depending on how the deal is structured, may also receive a small percentage of the appreciation at time of sale. These private investors have different motivations. Some simply want better returns than they can get in the stock market. Others are more concerned about future revenue.
This is where you can create a win-win by identifying their problem, merging with your interest and creating the win for both parties.

I bet you are now thinking of who you know who is a professional sports player. There are millions of millionaires out there to tap into. You can also do Internet searches for private money lenders.

These loans never effect your credit score and the qualifiers are more geared toward your investment management skills and the properties’ potential to make money.

2. Residential-to-commercial loans designed for residential investment

This is one of the newer products available.

Five residential units are considered a commercial product, so this residential-to-commercial loan merges five residential loans into one commercial portfolio. This is a great product for the rental property investor who struggles to get more investment loans. With these loans, you can buy five new properties or refinance existing properties, or a combination of both. Because this is a commercial loan product, more emphasis is put on financial status of the property than on your personal income-to-debt ratios.

Another great aspect of these loans is they do not have location boundaries. You can have five properties in five different states as long as the individual properties combined create a nice and profitable portfolio. T
his product is coming in handy with my seasoned investors.

Currently I have an investor who owns two properties in Philadelphia. These were originally bought with cash and of course cash tends to run out. With no additional cash you cannot even come up with a down payment to finance the next property. This loan creates the solution.

He put a contract on another single-family property and on a duplex. So this product allows him to finance these two existing properties he owns and the two other properties. Essentially, the equity in the first two properties represents the down payments. As these loans use the property as a performance base to repay the mortgage, he has further validation that he has made great investments.

3. Hard money lenders

Most of you have heard of hard money loans. They are great for flippers. The loans allow you to buy a property and rehab the property all rolled into one loan.

These loans are not your conventional bank style loans. These lenders care more about your investment property experience than they do about your credit score. They will typically lend 65% and up to 70% of APR (after repair value).

I have had a number of investors who use these loans. I had a client buy a nice little three-bedroom home in Clearwater, Florida. The after repair value was estimated to be $139,000. He paid $67,000 to buy the property and needed an estimated $22,000 for renovations. So the $67,000 and the $22,000 was a total of $89,000 that he wished to borrow from the hard money lender. As this $89,000 was just shy of the $90,000 that represented the 65 percent loan-to-value, the loan was granted.

This investor may have over-spent by around $1,800 because he put some of the cost for supplies on his credit card. But that is all the money he had to come up with out of his pocket, and that was only due to miscalculating the needed repairs. He sold the property after six months for $142,000 and profited almost $34,000 after all loan and selling costs.

These loans do not attach to your credit report. They are typically costly loans, but they are held for a short term. So as long as the math works, they are often considered a favorable loan.

4. Seller financing

I think this may be an investor’s favorite way to finance.

5 unconventional ways to finance your rental properties blog by Larry Arth for Personal Real Estate Investor Magazine

This is an investment property Larry Arth bought using seller financing

These loans are typically made available when conventional loans are not readily available. This may be due to economics where banks are not easily lending or for properties that do not fit a typical type of property purchase. Usually seller financing is made available when sellers have lots of equity, or best when they have no mortgage on the property at all.

They are able to offer you the property on a monthly payment plan instead of one lump-sum payment. The first duplex I ever bought was seller-financed. The seller was an aging investor. He understood the benefits real estate could offer. He made lots of money buying and renting property.

As he was getting older he wished to do more traveling and did not want to be tied down with real estate and property management. He was motivated to keep monthly revenue coming in and wanted to avoid the capital gains tax of simply selling his property and cashing out.

I hope you picked up on that. Indeed, as investors age, they are accustomed to the monthly cash flow. They like to maintain that cash flow and seller financing allows them to continue to receive monthly cash flow while avoiding a quick capital gains tax payment. So you always want to be on the lookout for these retiring investors.

These loans also do not attach to your credit report.

5. Subject-to loans

This is the loan for a seasoned investor.

It is probably the most controversial loan. And, there are right and wrong ways to do these loans. Essentially, you are buying a property where the existing homeowner has a mortgage on it.

Instead of getting a new loan, you make payments to the seller. He in turns makes a monthly payment to his existing lender. What you want to protect yourself against is a seller who pockets your payment without making his payment.

I am currently working with a buyer who wants to purchase a property subject to her purchase piggy-backing off the sellers’ loan. I recommended she have an attorney draft the paperwork. Done correctly, with transparency, these loans can be a good tool.

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