There are many good reasons for investing in real estate and owning multiple properties is a great way to diversify your investment portfolio.
If you’re renting those properties out to residents or business tenants, you can earn a steady source of income as well. Your overall net worth can increase exponentially as you acquire more properties if you can keep them profitable.
Even if you already own several pieces of real estate, however, further expansion can be difficult if you don’t have the funds on hand to pay for a new property.
Thankfully, you have several options available to pay for your next property and keep your upward financial mobility intact.
How to Pay for a New Property
Depending on your situation, any of the following ideas could work for you. As with any other financial decision, you’ll need to understand your own financial capability and the pros and cons of each option before choosing one.
Dipping into Home Equity (HELOC or Home Equity Loan)
One way you can pay for your portfolio expansion is by using the equity in one of your other properties.
A home equity loan can get you the cash you need in one lump sum by leveraging the value of another property, while a home equity line of credit (HELOC), provides money on a revolving basis much like a credit card.
If you choose a HELOC, you can use the line of credit to only borrow what you need. Depending on how much you qualify for, that might leave you a bit of extra cash to do any repairs or renovations on your new property as well—all while only having to make interest payments for up to 10 years.
With a home equity loan, you’ll receive all of the proceeds up front but will also need to make principal and interest payments throughout the life of the loan.
Home equity products are often easier to get than personal loans since they are secured by your home, and while they may have slightly higher interest rates than conventional mortgages, they’re still very affordable.
The downside to equity products is the risk. When you use property equity to purchase another, you put that collateral property at risk if you cannot make payments.
Take Out a New Mortgage
If your credit passes muster, you can apply for a new mortgage. You’ll have another monthly payment, and may need to pay closing costs, but you’ll be able to purchase the property. As with any mortgage, the property you’re purchasing will be the collateral, so if you don’t make your payment, you could lose your investment in foreclosure.
The good news about taking out a new mortgage loan is that the only property at risk is the one you’re purchasing; even if something goes wrong you may still protect your existing portfolio.
Small Business Loan (For Licensed Business Owners)
If the property you’re looking to purchase is for your business—or is a business property of any kind—you may be able to get approved for a small business loan to buy it.
The federal government’s Small Business Administration offers a number of loan guarantee programs that can help you get the money you need. You could also go through a private lender, such as your own bank.
In order to get one of these loans, be prepared to offer information on not only your personal finances but your business as well. SBA loans often have excellent interest rates and much longer terms than home equity products, making them an attractive option if you qualify.
Conventional Loans
In some cases, you can get a conventional loan to pay for a property. They can be a bit different than other types of mortgages, such as FHA loans or those made through the VA.
They’re not guaranteed by the federal government so you may be expected to make a down payment of at least 3%. If you put 20% down, you won’t have to pay for mortgage insurance—an expensive add-on.
If this is the type of financing option you’re interested in, you’ll also need good credit; typically, those with conventional mortgages are financially stable and can afford the larger down payments.
Cash Out Refinance
If none of the above options appeal to you, a cash-out refinance might be what you’re looking for. In this type of loan, you’ll create a new mortgage on an existing property in your portfolio, up to the appraised value of the property. That new loan will pay off the old one, and the difference between what you still owe and the amount of the loan is given to you in cash, which you then can use to purchase your new property.
The downside to a cash-out refinance is simple; you might not get enough cash from the loan proceeds to actually purchase a property outright, in which case you’ll also have to take out a mortgage on the new property for the remaining balance. That means you’ll have two monthly payments, including one on your existing property that may be higher than the original mortgage.
Conclusion
The options above can help you finance your next real estate portfolio expansion. Whether you choose to put one of your existing properties up for collateral on home equity or refinance product, get a small business loan, or even just get a new mortgage for your property, you should shop around for the best deal from a variety of lenders.
Before taking any of these actions, however, take a hard look at your finances and ensure that whatever option you choose can fit into your projected budget. All of these options have a certain amount of risk involved, and it’s important that you understand those risks before signing on the dotted line.
Not making your loan payments can cost you not only your collateral but also your credit rating for years to come. If you’re looking to expand your real estate portfolio, then one of these ideas can get you well on your way.
About the Author: Andrew Rombach is a Content Associate for LendEDU – a website that helps consumers, small business owners, and real estate investors with their finances. When he’s not working, you can find Andrew training for his next company 5k or hanging with his cat Colby.
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