There are a wide range of financing options for real estate investments. There are pros and cons for each category of financing. Some experienced, well-heeled investors will have better and more diverse financing options. While, new investors may have limited and costlier financing options. You are also looking at different financing options if you are looking to buy long term rental properties vs. flipping properties. With a buy and hold strategy, I’ll share my experience with financing.
If you are a salaried employee in a good financial position, you probably qualify for a conventional loan with only a slight premium to buy an investment property. I got conventional financing on most of my financed properties. As long as you stay with multi-family properties that are 4 units or less and don’t get involved with any commercial space, you get the best terms with the conventional loans. Your insurance also comes with a relatively modest premium. The differences in residential premiums vs. commercial premiums should be factored as you evaluate the pricing of a property. Notably, you should pay attention to your rental income vs. financing and insurance premiums on things like multi-family with more than 4 units.
Once you step away from conventional financing, the popular option is asset-based financing. The terms of these loans vary widely. So, you should shop around a bit. But it is almost certain that the financing costs will be more than conventional loans. My experience suggests that this type of financing is at least 100 basis points more costly than conventional financing. So, what do you get for paying this premium? Sometimes, you don’t have a choice when you get into commercial loans. Assuming you do have a choice, you might want to use the projected income from the investment property as a driver for the loan consideration as opposed to your regular wage income. Based on your income and debt to asset ratios, you might be limited on how many properties you can purchase. Once you get into backing the loan with the viability of the property as an investment, your options open up. In some ways, I like that someone is willing to lend you money based on the investment prospects of your property. It seems to validate your investment as being a viable investment.
I have a hypothesis that a larger portfolio of properties and a longer track record of investments opens up more options on financing as well as better terms. In my personal experience, the vetting process for financing seems to get easier as you scale your portfolio. Although getting scale does get me better visibility on potential deals, I don’t think I have seen much improvement on my financing terms. For now, I’ll continue to grow my portfolio with cash or conventional financing and explore different lenders to see if I can get a good deal. I think the lenders are out there. Stay tuned.