HOW TO FINANCE YOUR FIRST RENTAL PROPERTY: 6 BEST WAYS IN 2024
Investing in rental property is a proven strategy for building wealth and securing financial independence. However, the first and most crucial step in this journey is finding the right financing. In 2024, there are numerous options available to help you finance your first rental property, each with its own set of benefits and considerations. We’re here to help you make your money work for you. MY SMART COUSIN specializes in providing tailored solutions that will suit any aspect of owning investment property, from buying a house for the price of a car, something that is still entirely within the realm of the possible, to managing these properties once you own them. As an experienced Real Estate Investment Coach, we help you develop and implement a real estate investment strategy. We work with all clients and focus particularly on Black and Brown folks and women, providing advice that helps you build generational wealth. This blog will explore six of the best financing options, providing you with a comprehensive guide to making your real estate investment dreams a reality. 1. Conventional Mortgage Loans What is a Conventional Mortgage? A conventional mortgage is one of the most common ways to finance a rental property. It’s a loan that’s not backed by the government, unlike FHA or VA loans, and is offered by private lenders such as banks, credit unions, and mortgage companies. Advantages of Conventional Mortgages Things to Consider 2. FHA Loans (Federal Housing Administration) How FHA Loans Work While FHA loans are typically used for primary residences, there’s a loophole for house hacking—buying a multi-family property (up to four units), living in one unit, and renting out the others. This allows you to use an FHA loan for a rental property. Advantages of FHA Loans Things to Consider 3. Hard Money Loans What Are Hard Money Loans? Hard money loans are short-term loans offered by private lenders, secured by the property itself. These loans are often used by real estate investors who need quick financing, especially for properties that require significant repairs or renovations. Advantages of Hard Money Loans Things to Consider 4. Private Money Loan Understanding Private Money Loans Private money loans come from individual investors rather than financial institutions. These loans are often secured by the property and can be an excellent option if you have a strong network of potential lenders. Advantages of Private Money Loans Things to Consider 5. Real Estate Crowdfunding What is Real Estate Crowdfunding? Real estate crowdfunding platforms allow you to pool funds with other investors to purchase a property. This option has gained popularity in recent years as it offers a way to invest in real estate without requiring a large amount of capital upfront. Advantages of Real Estate Crowdfunding Things to Consider 6. Seller Financing How Seller Financing Works In seller financing, the property owner acts as the lender, allowing you to make payments directly to them instead of a traditional mortgage lender. This can be a win-win for both parties, especially if the seller is motivated. Advantages of Seller Financing Things to Consider SUMMARY Financing your first rental property in 2024 offers a variety of options tailored to different needs and financial situations. Whether you prefer the stability of a conventional mortgage or the flexibility of private money loans, the key is to choose the method that aligns best with your investment goals. With careful planning, smart financing, and a bit of creativity, you can embark on a successful journey into real estate investing and begin building a portfolio that generates long-term wealth. YOU CAN ALSO READ: HOW TO BUY RENTAL PROPERTY AS A COMPLETE BEGINNER FOLLOW US: @MYSMARTCOUSIN
A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY
If you have one or several investment properties that you’ve bought for the price of a car and want added income without building a bathroom, bedroom or finished basement, read on for insights on growing your cashflow in the short-term rental market. WHAT IS A SHORT-TERM RENTAL PROPERTY? A short-term rental property is a property that is rented out for an evening or a couple of days to a few weeks or months. In short, anything rented out for less than a year under an annual lease is viewed as short-term. The types of properties that can be rented out short term come in many flavors including: your home sweet home a tiny house or cottage that you place, either temporarily or permanently, in your backyard or a side lot next to your home a single family investment property a small multifamily investment property of 2-4 units an entire apartment building bought solely for the purpose of short-term rentals ADVANTAGES OF A SHORT TERM RENTAL INVESTMENT PROPERTY Short term rentals can provide you with increased cashflow on the revenue, expense and personal budget fronts, giving your pockets a wonderful case of the mumps. Your Own Vacation Getaway: If your investment property is located in a city that you frequent for vacations, family reunions or get-togethers, then a short-term rental can save you money by avoiding hotel costs, and generate income when you’re not using it. Also, having a vacation rental that you own makes it easier to block off vacation timeframes that work for you. Fewer maintenance headaches: Short term rentals are subject to less wear and tear than year-round rentals because: 1) they’re occupied in only short bursts of time (for instance, an evening or weekend), 2) the unit is furnished so there’s no wear and tear from furniture or other large belonging being moved to and from, and 3) the damage deposit for a short-term rental of a couple of hundred dollars usually invites a greater level of precaution from visitors than a long-term rental might. Additionally, because of the gaps between guests visits, repairs and minor cosmetic work can be done quickly before any issues turn into a more expensive problem. Higher overall monthly rental income: The daily rate for a short term rental is higher than the equivalent daily rate for a monthly rental. As an example, the average monthly rent for a 3-bedroom, 1-bathroom house in New Jersey is $1,800, which translates into an equivalent daily rent rate of $60 over a 30-day period. The average short-term rental rate for a 3-bedroom, 1-bath house in New Jersey is more than twice this amount, or $130-$150 a day. Although your investment property will certainly have some level of vacancy, over the long-term, your short-term rental will out-earn its long-term peers. Real-time Price Adjustments: A long-term rental under an annual lease offers the ability to adjust prices only once per year. Additionally, depending on the state and tenant population, the annual increase amount might be capped. In contrast, short-term rental investors can adjust their prices after each and every occupant, based on market conditions and opportunities. Thus, if a concert or sporting event is coming to your area on a particular weekend, you can raise the price for your rental unit based on the increased demand. DISADVANTAGES OF SHORT TERM RENTAL INVESTMENT PROPERTY Of course, as with most investments, there are always downsides that should be discussed. Short-term rentals will require more day-to-day involvement than annual rentals in terms of marketing and communicating with the revolving door of guests you will have. As such, before diving headfirst into short-term rentals the moment your annual leases expire, consider the challenges that come with this territory: Edging out Competition: In order to minimize vacancies and negative reviews, short-term rental landlords will need to consider as competition both short-term rental properties as well as commercial properties like inns, long-term stay hotels and conventional hotels. Investing both money and time on well-appointed furnishings will pay dividends in the short-term market more so than for long-term, unfurnished annual leases. Likewise, promotional discounts and other marketing sizzle will be required to keep your property top-of-mind with potential guests. Maintenance and Repairs: While renting out your property or a room in your house to a new guest each week may result in less overall wear and tear versus an annual rental, the frequent in and outs mean lots of mini and ongoing housekeeping on your end. If you are serving as the head handyman and housekeeper for your short-term rental business, this translates into a never-ending list of chores, honey-do’s and home repair purchases. Off-Peak Vacancies: Just as you factor in a vacancy rate for a traditional real estate investment property, you will need to price in the cost of vacancies for a short-term rental property. Do your homework to find out when vacation travel is down in your area and adjust your pricing and offerings accordingly. Alternatively, schedule large maintenance and capital improvement projects during off-season. Property Management: In many ways a short-term rental is like a traditional rental property that is located out of state. Both will require the use of a capable property manager to screen and choose tenants, address repairs and collect rent. Because of the added work, however, a short-term rental will attract property management fees that are significantly higher, from a low of 10% of the rent to a high of 50%, vs. a long-term rental where property management fees range from a low of 5% to a high of 15%. This added cost will need to be priced into the value of the short-term rental opportunity. HOW TO MAXIMIZE YOUR PROFITS WITH SHORT-TERM RENTAL PROPERTIES Short-term rental properties will provide returns throughout the year, but as discussed above, a more active engagement strategy is required. LOCATION AND CONDITION OF THE PROPERTY – The largest driver of profitability, more so than with long-term rentals, will be the location of the property because of it serving as a vacation residence for guests. Inspecting your property from the vantage point of guest will help ensure that