9 Ways to Buy a Single-Family Investment Property: Pros & Cons

If you’re buying a single-family investment property, there are multiple funding options to choose from. Needless to say, though, not every funding type works for every investor—especially if you’re a first-time investment property buyer. It’s critical to weigh each’s pros and cons so you can make an educated decision. Let’s break down some common types’ pluses and minuses below.

Main Takeaways

• A first-time investment property buyer can turn to conventional bank loans, home equity loans, business credit lines, hard money loans, crowdfunding, seller financing, partnering with other investors, portfolio loans, or even a self-directed IRA.
• Many emphasize qualities like low interest, fast delivery, and convenience. On the flip side, those same ones can require your property as collateral, have short repayment terms, and other downsides. So, you have to weigh each’s pros and cons and see if they’re worth it in the end.

Table of Contents

• Conventional Bank Loans
• Home Equity Loans
• Business Credit Lines
• Hard Money Loans
• Crowdfunding
• Seller Financing
• Partner with Other Investors
• Portfolio Loans
• Self-Directed IRA

Conventional Bank Loans

With conventional bank loans, lenders provide loans in which the property you’re buying is also the loan’s collateral.

Usually, investment property conventional loans have strict criteria regarding income and credit. They also tend to require bigger down payments upfront. Finally, since they’re collateral-based, you risk your property ownership if you can’t repay the loan.

However, our property managers in Northern Virginia feel there are still a few big draws in these loans’ favor. They require lower interest rates throughout the years. Their terms usually span decades, so your repayments are spaced out. Even better, you can get them at a fixed rate. These are all huge pluses.

Home Equity Loan

Home equity loans have you tap into a certain percentage of your home equity for funding. As such, they require no down payment. You simply convert the assets you have for financing.

In effect, home equity loans function as a line of credit you can borrow from. Like other collateral-based loans, you must repay it with interest later, or else you face foreclosure. You also must ensure the equity percentage is sufficient to buy your eyed investment rental.

Business Credit Lines

With business lines of credit, you can borrow a predetermined amount of money on demand. Even better, you only pay interest for the money you use, not the entire pre-set amount. These factors can make business credit lines a great option for a first-time investment property buyer.

That said, a business line of credit’s interest rates can change a lot over time. So, you need to be prepared for that risk.

Hard Money Loans

Hard money loans are collateral-based loans from private individuals or companies, rather than banks. You can be approved and get funding much faster than with bank loans. For instance, some can fund you in a couple of days. Furthermore, hard money lenders usually care more about your collateral property’s value than they do your credit score.

Because hard money lenders take on more risk in their lending, they usually ask for higher interest rates than banks. Also, their repayment terms are oftentimes short, up to a year long. Due to this, you will have to repay the loan more quickly. Considering the risks, hard money loans are perhaps best suited to those who need funding urgently or want bridge funding.

Crowdfunding

With crowdfunding sites, many investors can pitch in to pay for an investment rental. The benefit of crowdfunding is that it can require far less investment than funding a single-family investment property all by yourself. After all, many people cover just 5% to 10% of the overall property. This may be more manageable for a first-time investment property buyer.

Again, these amounts require repayment within months, so you will need to repay them quickly. In addition, you should have a professionally combed-through plan for implementing your business with other investors.

Seller Financing

When you use seller financing, the property’s seller is your lender. You give them an initial down payment. Then, you agree on terms like routine payments, interest rates, and the repayment timeline. Finally, they lend you the rest of the property’s sticker price. There’s no need for the long, laborious processes banks require. In other words, you cut the middleman out.

Of course, when doing this, vet the seller thoroughly to ensure they’re reliable. For example, if your seller can’t pay off their own mortgage, they may have to foreclose your investment rental. You don’t want to find yourself in the lurch.

Partner with Other Investors

Another way of buying an investment rental is through investor partnerships. This lets each party pool their strengths together as a team. For example, if you’re well-versed in which amenities tenants want the most, that could be your contribution to the project. The other person can fund a property that fits your vision. All in all, you can bring your skills, knowledge, and time, while they can bring the money.

If done right, this can be a great option for a first-time investment property buyer. On the plus side, this can grant you more resources and manpower. You can have another expert to consult with in your practices. On the other hand, if you go in with the wrong partner, you can be stuck with them for years on end. After all, you can’t make all the decisions and keep all the income yourself.

Portfolio Loans

If you want to have multiple single-family investment property purchases at once, collateral-based portfolio loans are an option. They let you borrow funds for multiple investment rental houses under one convenient loan. Moreover, they can be easier to qualify for than bank loans.

However, they can have higher interest rates or down payments than bank loans. Furthermore, it means putting all your eggs in one basket. If you can’t repay the loan, you will have to give up all properties included in it. Those are things to keep in mind.

Self-Directed IRA

You also can use your self-directed Individual Retirement Account (IRA) to buy a single-family investment property. With this method, you can completely write off your property’s income taxes.

Still, it warrants mention that property ownership and income lie with your IRA. So, you can’t get it right away. Instead, you can receive it when you retire. Also, since you don’t own the property, you can’t deduct costs related to it from your taxes. All that considered, you should weigh the pros and cons carefully.

Get Your Single-Family Investment Property Managed with BMG Northern Virginia

From conventional bank loans to crowdfunding, there are plenty of options for financing your single-family investment property. Whether you prioritize getting funding fast, with fewer taxes, or with no down payment, there’s something for everyone.

As you know, buying your investment rental is just the beginning of your journey. Many times, the average first-time investment property buyer learns that the hard way.

Countless landlords find themselves overwhelmed by the sheer magnitude of operating responsibilities involved in running a rental. There is virtually endless work, like handling maintenance, tenant screening, and responding to tenant concerns. Even worse, if you make mistakes in any of these areas, there could be substantial legal and financial ramifications. That’s why so many of them turn to professional property management.

Some tasks property managers like us handle include:

• Tenant customer service
• Property maintenance
• Legal compliance
• Rent collection
• Lease renewals
• Tenant screening
• Accounting
• Inspections

…and more. Call us today to make your investment more secure.