Non-Traditional Ways to Finance Your Investment Property

There are a handful of traditional ways to finance your investment property. But if you have exhausted the tried-and-true path or are interested in funding your investment home without the assistance of traditional banks, below are alternative ways for you to consider.

Traditional Mortgage

Let's start with the most traditional way to purchase a home: securing a loan through a lender. This is because it allows buyers to own a home without putting up the full purchase price of the home in cash. For primary residences, buyers can put down as little as 3% of the purchase price for a downpayment. However, it is typical for lenders to require a 20% down payment when it comes to investment properties. There are instances where companies will allow for less than 20% down payment, but when you put down less than 20%, you'll be required to pay an extra fee called Private Mortgage Insurance (PMI). Avoiding the additional expense of PMI is advantageous when buying an investment property because, ideally, buyers will have net cash flow above all expenses and every dollar of savings counts toward this goal.

If we put the 20% down payment into context and say the home purchase price is $250,000, your down payment will be $50,000. In addition, lenders charge Closing Costs, which are usually around 2% but can vary. You'll see this on Doorvest home profiles as "cash outlay" or the total amount you'll need to bring to the home closing.

Cash Outlay = Down payment + Closing Costs

What makes investing in real estate through leverage so special is that your home will appreciate on the purchase price despite you only putting down 20%. In the example of the $250,000 home, if appreciation is 8% in the first year, your home's value will have increased to $270,000 - an increase of $20,000 even though you only had to put down $50,000.

Finally, if your strategy is to accumulate more and more investment homes, using leverage will save you funds for your next home purchase rather than paying for the home in all-cash.

All-Cash Purchase

Purchasing in all-cash can give a buyer the peace of mind of not having any debt obligation to pay off. Paying in cash eliminates the month-to-month mortgage and interest expenses, which increases cash flow each month. In the event of a potential tenant vacancy, having paid with all cash will eliminate the burden of covering mortgage expenses that month.

Here's the financial breakdown on an example home profile with a 6% mortgage and 20% down.