Learn different options to finance your first investment property from experienced investors.
Using both traditional and non-traditional methods as a real estate investor is possible to finance your first property. If videos are more your speed, watch our full explanation below.
Let’s get into it!
Option 1) Conventional bank loan
A conventional loan is a viable financing option for first-time investors. It may seem obvious, but it works.
The big five banks here in Canada are great options for people with savings or access to capital. Paired with a steady income and the ability to qualify, you can get a conventional bank loan for your investment property.
Option 2) Accessing equity
The second option, arguably the most common way people finance their first investment property, is by accessing equity from an existing property.
One can access existing equity through a complete refinance of their primary residence or a home equity line of credit. With time, it’s typical that a primary residence will appreciate in value. The appreciation of the primary residence will give the property owner access to equity. Many first-time investors will use this equity to purchase an investment property.
With that money, you can get a brand new mortgage on your primary residence with up to 80% “loan to value” and you’ll receive a cheque from the financial institution that’s giving you your new mortgage to spend however you want.
Our clients who are first-time investors will typically refinance their primary residence and use the equity they’re given from their refinancing to place a down payment on their new investment property. The refinance may also include capital for renovations as well.
Option 3) Leverage alternate lending institutions
The third option to finance your first investment property is alternate lending institutions. Some examples of alternate lending institutions may include credit unions or smaller lenders. The value of leveraging these institutions is that their rates and terms are drastically different in this classification.
Some may consider the lending conditions more flexible, which can attract first-time investors. However, the more flexible the criteria, the higher the interest rate or fees. It’s important to ask yourself what lending conditions make you the most comfortable. Perhaps the conditions of the smaller lender feel less risky or give you more time to repay the loans, which can be valuable. Then again, some smaller institutions will have promotional rates to compete with the big banks, so the conditions are all relative. Do your research, understand what you’re signing up for, compare the competition and choose what’s right for you.
Option 4) Private loans for your first investment property
The fourth option to finance your first investment property is a private loan. Often referred to as “private money,” these loans are from one individual directly to another. The loan terms and rates will vary based on the situation.
The terms will be set based on the relationship, the project, the track record, etc. Generally, personal loan rates will be higher in exchange for flexibility compared to the other options. Some people will get a private loan for the down payment; others will get a loan for the whole project.
It’s up to the lender to create conditions that make sense for them, but private money can help you achieve the same goal as a traditional lender.
Option 5) Combination tactics
The fifth and most pervasive way to finance your first investment property combines these options. In this scenario, it’s common for investors to start with a primary residence. People that have purchased primary residences here in the Waterloo region have single-family homes within the last five years between $500,000 and $700,000. With appreciation at play, these homes would now be worth anywhere from $900,000 to $1 000 000, providing accessible equity of $200,000-$300,000.
Using the home’s equity and savings, you may have enough funds for a downpayment. People will then refinance their primary residence to purchase an investment property, creating a new loan. The loan is an 80/20 split. You are refinancing the equity out of your property up to a maximum loan-to-value of 80%. The remaining 20% is the equity left in your home.
All in all, five ways to finance your first investment property are:
- conventional bank loans
- accessing equity through a refinance
- alternate lending institutions
- private money or private loans
- combination tactics
Other helpful tips
If you secure your financing, here are some additional considerations that can maximize your first investment opportunity.
Invest in a duplex
A duplex is a two-unit property, that allows you to have two separate renters and create more cash flow. If the monthly rent in the property is competitive with current market rates, you will have a few hundred dollars a month extra toward your debts. As the market appreciates, you will build more equity in investment and primary residence in the coming years. In turn, you’ll be paying down the debt on the mortgage of your primary residence, and the tenants you have in your legal duplex will be paying down the mortgage on that loan.
It’s a great way to start your investing career.
Put less than 20% down
If you’re using alternate lenders, private loans, home equity lines of credit and other financing options, there could be an option to purchase your first investment property with less than 20% down. It’s all dependent on your personal financial situation.
In this scenario, what some of our past clients have done is they’ve had a primary residence that they’ve been at for a little while and built up some equity. Typically a townhouse, a condo, a smaller detached or semi-detached home. Once they’re ready to move up into a larger property instead of investing in a larger space, they purchase an investment property while keeping their first home.
Make your investment property your primary residence
Another option is to move into your investment property, taking one of the units and renting out the others. In this circumstance, you can put less than 20 because it is a primary residence.
Of course, this will always come down to the numbers and evaluating what makes the most sense financially. For young investors, this is a great option to purchase an investment property without needing to use all of your capital.
There you have it! Five ways to finance your first investment property and some additional tips. If you’re looking for other ideas or guidance on how to get your investment portfolio started, feel free to contact us.
We’re always happy to have 1-2-1 consultations. Pick our brains, and we can provide the building blocks to start investing confidently.