By RPM Central Valley
Are you planning on buying rental property in the Central Valley? If so, you’re making a smart choice.
Although some investors may be able to finance their purchase with cash, the reality that most investors will have to find some other way to purchase their rental property.
If you’re wondering how you’re going to finance your rental property, this article will provide you with useful tips for financing a rental in the Central Valley.
Traditional Mortgage Loan
The first and obvious way you can finance the purchase of a rental property in the Central Valley is to get a traditional mortgage loan by using the equity from your primary residence and using that money towards the purchase of a rental property.
This involves getting a loan from the person you’re buying the property from. In some cases, if the seller is willing to lend you money, it’s easier (read: less paperwork) than getting a loan from a bank.
I’ve seen these deals work in a number of scenarios: The seller might finance either the down payment or the full purchase price. The seller might be another property investor — or they might be the property’s live-in owner.
The key to success is to ensure you agree on a fair interest rate for the loan. If you don’t have much experience in this area, it may be wise to work with your CPA and/or attorney. And regardless of how much experience you have, be sure to get the terms of the loan in writing, with signatures.
Another great financing option is to partner with someone who has enough money for a down payment. This is an effective strategy if you have a friend or family member who’s interested in getting involved in property investment, but maybe isn’t as interested in the day-to-day work of screening tenants and collecting rent payments.
In this scenario, what often happens is that one partner puts up money and the other handles all the actual work of being a landlord.
The key to success here is to agree on how to split proceeds. I recommend thinking about it in terms of aligning the risk and reward with costs and benefits. Your partner is taking on all the financial risk, but you’re putting in all the legwork of bringing in revenue via rent. Make sure the way you split proceeds reflects your contributions.
Whatever you decide makes sense, it’s best to have your terms in writing. Services like LegalZoom and Rocket Lawyer can help with drafting basic legal docs if you don’t have an attorney. (Full disclosure: Rocket Lawyer is a partner of ours.) Another strategy we find effective is to form an LLC, which requires you to put together an operating agreement. That document is a great place to lay out roles and responsibilities for all parties.
The Federal Housing Administration (FHA) was founded to encourage home ownership. One of the ways it does that is by offering home buyers the chance to buy property with just 3.5% down.
While FHA loans are specifically designed to facilitate the purchase of owner-occupied homes, it’s completely allowable to buy a two-, three- or four-unit building, live in one unit, and earn rental income from the others. In fact, this can be an incredibly cost-effective way to finance a rental property, especially if it’s your first.
FHA loan limits are different in every county, so part of the art here is making sure the loan limit where you want to buy is high enough that you can purchase a multi-unit property.
Get Property Management in The Central Valley
For property management in the Central Valley contact RPM Central Valley today by calling us at (209) 572-2222 or click here to connect with us online.