Five Tips to Finance Your Next Investment Property

An investment property can become a steady source of passive income; you can continue earning income by renting out the investment property and potentially turn property management into a second job or even your full-time career. The following tips can help you assess your financing options and may help you secure your investment property with greater control and more flexibility over your financial obligations.

Avoid Credit Card Financing

Credit cards are easy to get for most Americans, but they are certainly not easy to pay off. The average person can likely secure multiple lines of credit from different creditors with little to no trouble, but most credit cards come with exorbitant interest rates. Don’t be fooled by low introductory APR rates; most of these contracts only promise little to no APR for the first year at most. Unless you intend to pay off the credit card within that time completely, you’re going to pay a higher interest rate than most other forms of lending require.

Your credit score determines your creditworthiness and how willing credit card companies will be to extend lines of credit to you. If you have a good credit score, this can be the fastest way to secure the financing you need, but your credit score will certainly take a hit if you do not repay your balance in a timely fashion. Ultimately, credit cards may offer quick and easy access to additional funds for your investment property, but they can turn into additional expenses you don’t need when you’re trying to make the most of your new investment.

Consider Borrowing from Your 401k

401k loans are some of the easiest loans to secure. They are also relatively cheap since you are effectively borrowing from yourself. When you take out a loan against your 401k, you will likely enjoy more flexible repayment options than a conventional bank loan would allow. However, the institution that holds your 401k may have strict requirements when it comes to borrowing against your 401k balance. For example, you may need to meet a minimum investment requirement, and you will likely need to pay a service charge to take out the loan.

One of the best benefits of taking out a loan against your 401k is that any interest you pay while repaying the loan is effectively paid back into your 401k. You are essentially paying your future self for the ability to borrow against your retirement account.

Work with a Local Bank or Credit Union

Conventional nationwide banks tend to offer much less flexibility when it comes to loans, personal or otherwise. These banks have branches all over the country and serve tens of thousands or even millions of customers, so they don’t offer the same level of personalized service that you would find at a local bank or credit union.

Take time to research the local banks and credit unions in your area and determine your eligibility for different types of loans from these institutions. You will likely discover that a local bank will not only offer a more attractive financing agreement than you would find at a nationwide bank branch, but they will also take the time to develop a more personal business relationship with you. Investing through a local bank helps the bank and the local economy. These types of relationships can be incredibly valuable in the long run if you plan to make property investment a significant source of income.

Cross-Collateralize Your Home

You don’t need to sell your home to get value out of it as an asset. You can also avoid the hassle of a second mortgage by simply offering your home as collateral in a financing agreement. If you don’t have enough liquid cash for a down payment on investment property but have a large amount of equity in your home, this could encourage a lender to offer more flexibility in a financing agreement. However, this is a bit of a risky option. If you default on the loan, you won’t only lose your investment property, but your home as well. Think carefully before choosing this option.

Work with a Reputable Property Management Team

Buying your investment property is just the first step in handling your financing obligations; you also need to turn that investment property into a lucrative source of income. This may require upgrades and renovations before renting it out, but it will also demand your consistent attention, marketing the property to potential tenants, and maintaining the property to keep it safe, comfortable, and functional.

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