Investing in real estate can be an extremely lucrative venture with ample benefits like generating passive income from rent, building your equity over time, and diversifying your portfolio. However, it often requires a significant start-up cost as well as many factors to consider prior to investing

With interest rates on the rise, purchasing an investment property can seem almost impossible. But it doesn’t have to be. In this guide, we’ll go over the different options to finance an investment property, from a traditional mortgage to alternative financing options!

Financing an Investment Property with a Traditional Mortgage

There are several financing options available for real estate investors. Despite this, traditional mortgages remain one of the most common and accessible ways to finance an investment property. Here are five tips to increase your chances of getting approved:

Improve Your Credit Score

Banks are more likely to give out loans to borrowers with good credit. Plus, the higher your credit, the better your loan terms will be. To increase your credit score, prioritize paying bills on time, reduce your debt, and fix any credit report errors.

Make a Sizeable Down Payment

Having at least 20% of the property’s purchase price saved for the down payment highly increases your chances of getting approved for a mortgage.

Maintain a Stable Source of Income

Having a stable employment history can improve your chances of getting approved for a mortgage. If you’re self-employed, keeping track of your monthly income to prove your financial stability.

accountant looking over income reports with some stacks of money in their desk

Reduce Your Debt

Having debt won’t automatically ruin your chances of mortgage approval. Paying your bills on time can help you build your credit score over time. But if you’re planning on financing an investment property, it’s best to try to keep your debt-to-income ratio low.

Get Pre-approved

Seeking pre-approval from a lender can give you an idea of how much money you can borrow.

Alternative Ways to Finance an Investment Property

You can purchase an investment property even if you don’t get approved for a mortgage or don’t want to deal with the rising interest rates of traditional mortgages. Here are eight alternative options to get funds to invest in real estate:

1. Peer-to-Peer Lending 

A great alternative to a traditional mortgage is to take out a loan from a private lender. The safest bet would be getting a loan from a family or friend. But if you can’t find someone to help, there are peer-to-peer platforms online and real estate investment networking events where you can connect with private lenders. Make sure to ensure the interest rates are favorable to you before signing on anything.

2. Owner Financing

If you have limited credit or can’t secure a traditional mortgage, applying for owner financing is a great alternative. This financing option often offers flexible terms, lower closing costs, and expedited transactions. However, because it’s not the norm, you’ll have to convince the seller to agree with this kind of financing. 

a calculator a stack of money and person making a budget

3. Fix-and-Flip Loans

If you’re considering purchasing an investment property to flip and resell, you should look into fix-and-flip loans. These short-term loans often offer low interest rates and flexible terms, which can be more beneficial to house flippers than a traditional mortgage. 

4. Home Equity Line of Credit (HELOC)

This is a great alternative to home equity loans. With a home equity line of credit, you can get the funds as needed instead of a large sum all at once. This means you can borrow only the money you need. The drawback is that most HELOC loans have variable rates, meaning they can increase at any time.

5. Home Equity Loans

If you already own a property and are trying to buy another one, tapping into your equity can be a great way to get the funds you need. Home equity loans offer relatively low interest rates, repayment terms of up to 30 years, and potential tax reductions.

What’s more, these loans can be used for anything from purchasing an investment property or making home renovations to debt consolidation.

6. Personal Loans

You can use a personal loan or even a credit card to finance a property your looking to rent out. This can be a good option if you already have considerable savings, as personal loans typically offer lower amounts than a traditional mortgage. Also, the interest rates tend to be higher. So, it’s best to use this as a last resource.

hand holding a blue credit card

7. Margin Loans

A line of credit such as a margin loan allows you to borrow funds against the value of any investment you currently own. This short-term funding tool can be a lifesaver if you’re in a pinch and can’t get money elsewhere.

However, margin loans can be a risky move. For instance, if your investment declines in value, you run the risk of amplified losses.

8. Life Insurance Policies

Many life insurance policies serve as a type of liquid asset you can cash out if needed. If you have permanent or whole-life insurance, you can borrow against your policy to invest in real estate.

Of course, the funds will be way less than you’ll get in a traditional mortgage. But this funding alternative can come in handy to pay the down payment, closing costs, or other up-front fees you didn’t anticipate.

Bottom Line

Financing an investment property requires careful planning and consideration. The most common route is to secure a good mortgage. Improving your credit score and saving for a considerable down payment can significantly increase your chances of getting approved.

But, even if you can’t secure a mortgage, there are many alternative financing options available, such as peer-to-peer lending and home equity loans. Now that you know this, you can start planning to make a sound real estate investment. 

Do you need help finding the right investment property in Nashville? Contact Brentwood Square Management today! With our knowledge of the Tenessee real estate market, we can help you get the most out of your money.