Buying your first investment property can be intimidating. Investing in real estate is a substantial commitment that requires time, money, and knowledge. While we can’t provide you with time or money, we can provide you with the knowledge you need to start investing wisely.
There’s more than one way to finance your investment, and each method comes with its own potential risks and rewards. Understanding all your options will allow you to create an investment strategy that supports your financial goals.
Keep reading to learn five common ways to buy your first investment property.
Pay in Cash
Paying in cash is the most simple, straightforward approach to purchasing an investment. However, there’s more to this strategy than just having the money on hand. Before you decide to pay upfront, consider the pros and cons:
- You’ll be able to close faster once you find the perfect property
- No interest payments
- You’ll hold 100% equity outright
- You’ll be more insulated from market downturns and vacancies in between tenants
- No leveraging power
- Limited buying options based on the amount of cash you have on hand
- Less cash-on-cash return
- Reduced tax benefits
Apply for a Conventional Loan
This is another straightforward option, and it’s one of the most common ways investors purchase real estate. The exact requirements for taking out a mortgage will vary by state, lender, and the type of mortgage you choose, but most conventional mortgages require a 20%-30% down payment.
Depending on the type of mortgage you select, you’ll also be subject to interest rates that are either adjustable or fixed-rate. When you apply for a conventional mortgage, lenders will take factors like your assets, debts, and credit score into consideration before approving you for a loan.
Try House Hacking
‘House hacking’ is an investment term that refers to purchasing a multi-unit property and then living in one of the units while you rent the others for profit. The main advantage of this strategy is it allows you to qualify for a wider variety of loans.
Both VA loans and FHA loans are government-backed options that provide borrowers with low-interest rates and low (or zero) down payments. However, these types of loans require borrowers to reside in the property they purchase, which is why house hacking can be a great option.
If you’re considering taking out a first time VA loan or a first time FHA loan, you might not be sure if you qualify. Spending some time researching your loan options is key because successful house hacking is often contingent on securing low down payments.
Consider a Live-In Flip
A live-in flip is exactly what it sounds like— you buy a home, move in, make substantial renovations that will increase the property’s market value, and then sell the home for profit. House flipping is a mainstay in real estate investment, but live-in flipping provides buyers with several unique advantages.
Residing in a home while you renovate allows you to understand exactly what needs to be improved in order to make a property more attractive to potential buyers. It also allows you to fully manage the renovations and be involved in every step of the process. Additionally, a live-in flip eliminates the need to pay for other housing.
Capitalize on Home Equity
If you own your home, you’re already in a great position to start investing in real estate. Equity is the difference between what you owe on your home, and what your home is worth. Tapping into your home equity allows you to use the difference to pay for big-ticket items, like putting a down payment on an investment property.
If you’re considering using home equity, your two best options are:
- Cash-Out Refinance Loan – This type of loan allows you to replace your existing mortgage with a bigger one. The difference will be given to you in cash, and you’ll pay it off monthly (with interest), just like you would a standard mortgage.
- Home Equity Line of Credit – Often called a HELOC, this option provides you with a line of credit that uses your home as collateral. A HELOC is similar to a credit card because you only pay back what you owe (with interest), and you can only spend up to your limit (determined by the amount of equity you have in your home).
There’s a First Time for Everything
We hope by now you’re feeling more confident about jumping into the world of investment real estate. If you’re still feeling nervous, don’t worry. There are a plethora of resources and professionals available to help you dive in.