If it’s time to talk about financing an investment property, you’re likely ready to purchase something that you’ll rent out.
That’s good news.
The Colorado Springs rental market is strong, and the demand is high for well-maintained homes in good locations.
But before you can enjoy consistent rental income every month and the impressive ROI you’ll earn in the long term, you have to decide how you’ll pay for your investment. There’s always the option of cash. If you happen to have that kind of money liquid, you can avoid the expense of interest and lending fees and buy a property outright. That’s going to give you some great cash flow right from the start. It’s also going to make your offers more competitive; buyers will be eager.
It’s not the only way, though, and if you’re interested in leveraging other peoples’ money to invest in a Colorado Springs rental property, there are other ways to go about it.
Let’s take a look at some of the options and strategies you have when it comes to financing an investment property. We can offer ideas that range from conventional mortgages to government-backed loans. The best idea for you will depend on the type of property you’re buying, your financial situation, and your investment goals.
Conventional Loans and Mortgages
Let’s start with the financing option we all know and love. The conventional loan. If you own and occupy a home of your own, you may have purchased that home with a mortgage. It’s the immediate go-to lending product for most consumers who want to buy property.
A conventional mortgage is a type of home loan that is typically offered by lenders such as banks and credit unions. They can be either conforming (meeting the guidelines set by Fannie Mae and Freddie Mac) or non-conforming (also known as jumbo loans for higher-priced homes).
There are many good reasons to use a conventional loan when financing your investment:
- Flexibility in Terms and Conditions
Conventional mortgages offer a variety of options in terms of loan term (15-year, 30-year, etc.) and type (fixed-rate, adjustable-rate). This flexibility allows investors to tailor their loan to fit their financial strategy and investment timeline.
- Potentially Lower Interest Rates
Compared to other types of loans, such as hard money loans or private financing, conventional mortgages often come with lower interest rates. This can significantly reduce the overall cost of financing your investment property over time.
- Higher Loan Amounts for Well-Qualified Borrowers
For investors with strong credit scores and stable income, conventional loans can provide substantial loan amounts. This is particularly beneficial if you’re looking to purchase higher-valued investment properties.
- Avoiding Mortgage Insurance with a Larger Down Payment
If you put down at least 20% of the property’s value, you typically won’t have to pay for private mortgage insurance (PMI). This can save you money and increase your cash flow from the investment.
A conventional loan, however, is not going to work for every investor. Here are some of the reasons you might want to consider something else:
- Higher Credit Score Requirements
Conventional mortgages typically require a higher credit score compared to government-backed loans. This can be a barrier for some investors, especially those who are just starting out or recovering from past credit issues.
- Larger Down Payments Needed
For investment properties, lenders often require a downpayment of 20%-25%. This can be a significant hurdle for investors looking to minimize upfront costs and preserve capital for other investments.
- Stricter Qualification Criteria
The qualification process for a conventional mortgage can be rigorous. Lenders will scrutinize your debt-to-income ratio, credit history, and asset documentation more closely than they would for owner-occupied properties.
- Expect a Longer Approval Process
Due to the thorough verification process, obtaining a conventional mortgage can take longer than other financing options. This may not be ideal if you need to close quickly on a great investment opportunity.
Government-Backed Loans for Colorado Springs Investment Properties
Typically, FHA and VA loans are intended for primary residences. However, there are circumstances where these loans can benefit real estate investors. You’ll have to occupy one of the units in the property you’re buying, which means you’ll have to be buying a duplex or a multi-family building.
There are also loan limits for an FHA loan, and those limits depend on the county. For example, in El Paso County, the loan limit for a four-unit property is currently $995,200.
Down payments are minimal, which is why these loans can be so attractive to certain investors. For an FHA loan, only a 3.5% down payment is needed. For a VA loan, there is typically no down payment needed.
Obviously, this type of financing will only work if you’re buying a multi-family rental property, live in one of the units, and qualify as a veteran or eligible for the FHA loan.
Hard Money Loans
Hard money loans are short-term, asset-based loans typically used by real estate investors. Unlike conventional loans, which rely heavily on the borrower’s creditworthiness and financial history, hard money loans are secured by the property’s value. This means that if you default, the lender can recoup their investment by selling the property. Here’s a look at why investors tend to like hard money loans:
- Fast Approval and Funding. Due to fewer requirements, hard money loans can be approved and funded quickly—sometimes in just a week. This speed is crucial in competitive real estate markets where opportunities can disappear overnight.
- Flexible Terms. Unlike traditional lenders, hard money lenders can offer more flexible terms tailored to your specific project needs. This can include interest-only payments and balloon payments at the end of the loan term.
- Higher Interest Rates. Typically, the interest rates for hard money loans can land in a range that’s higher than conventional mortgages. However, the benefits of accessibility and speed often outweigh the cost for investors who need to act quickly.
It’s also worth noting that hard money loans often need to be paid back in a much shorter timespan than a conventional loan or a government-backed loan. Your payment will be due in just a few years, which means you’ll have to be prepared to sell the property or refinance into a different kind of loan. This might be worth it if you need access to funds faster, if you’re looking for an easy path to qualification, and if you have a unique investment property that might be difficult to finance otherwise.
Private Money Lenders
Private money lenders can be individuals or companies willing to lend money directly to investors. This option can be beneficial if you have a network of contacts willing to invest in your rental property investments. Terms are often more flexible than traditional loans, and interest rates can be negotiated.
With money from a private lender, you can enjoy flexible terms and conditions, you can work with your lender on a lower interest rate, and you can work around any unique situation or credit issues you might have in your financial history.
One of the problems with private money lenders is that these people can be hard to find. It may require a personal relationship with the lender, and that can be tricky. If there’s a friend or family member or a colleague who has money to lend, the conversation might be easy. If not, you’ll have to do some research and some networking to find a lender.
There’s not always a lot of structure with private money loans. The lack of standardized procedures can be unsettling, and we recommend that you have a contract in place that’s been reviewed by an attorney.
Financing Colorado Springs Investments with Home Equity Loans or HELOCs
If you own a primary residence with substantial equity, you might consider a home equity loan or a Home Equity Line of Credit (HELOC) to finance your rental property purchase. These options allow you to borrow against the equity you’ve built in your home.
Here are some of the pros to financing your investment this way:
- Lower interest rates than personal loans
- Tax-deductible interest in some cases
- Flexibility in how funds are used
And here are some of the cons:
- Puts your home at risk if you fail to repay
- Closing costs and fees can be high
- Requires significant equity in your existing home
Have You Considered Seller Financing?
In some cases, sellers may be willing to finance the property themselves. Instead of obtaining a traditional loan, you make payments directly to the seller under agreed-upon terms. This option can be particularly advantageous in a slow market or when working with motivated sellers.
You don’t have to worry about bank approval, and seller financing options often come with flexible terms and conditions. You can bypass traditional lending fees, too, allowing you to keep more of your money at the beginning of your investment cycle.
You will likely have to pay higher interest rates on a property that’s financed by a seller, however. Most loan terms are shorter, so you’ll have to refinance eventually. Without property professional help, these deals can also come with potential legal complexities.
Let’s talk about your unique situation and your investment goals for the property you want to buy and for your entire investment portfolio. Contact us at Muldoon Associates.
