How To Finance Turnkey Rental Properties
Turnkey properties are a great addition to any investment portfolio. Due to the nature of this type of investment, however, finding financing to assist with making the purchase can sometimes be difficult. To that end, here is a look at some of the options that you can explore for financing a turnkey rental property.
Cash is by far the simplest way to finance turnkey rental properties. Not only does this help to reduce the amount of paperwork that is involved with the process, but it can also help to reduce your overall costs by eliminating loan fees, removing the requirement for an appraisal and title insurance, and eliminating the need to put real estate taxes in escrow. Many cash buyers receive discounts from sellers. Of course, if you do not have the cash available, then you will have to look into other ways to finance your investment.
If you don’t have the cash available to purchase your turnkey rental property, you will need to take out a loan. To obtain a loan, you will need to demonstrate a solid work history while also showing that you have a steady income to cover your loan payments. You will also need to have a solid credit score to assist with being approved for the loan.
In addition to assessing your personal finance history, the lender will also consider the value of the property compared to its purchase price. This comparison is known as the loan-to-value ratio. This ratio also helps the lender see how much you will still owe on the property after making a down payment. If your down payment is less than 20 percent, your lender may require you to obtain private mortgage insurance as part of the deal. This insurance is meant to protect the lender if you fail to repay your loan as agreed upon.
Several different types of mortgage loans are available for turnkey rental properties. The two primary types of mortgage loans are as follows:
- Fixed-Rate Mortgages: The interest rate on the loan remains the same throughout the entire lifetime of the loan, which means the monthly payments also remain the same.
- Adjustable-Rate Mortgage: The interest rate periodically changes along with market fluctuations, which means your monthly payment may go up or down throughout the lifetime of the loan.
Alternative mortgage options are also available in some cases. Even FHA loans can sometimes be used to pay for turnkey rental properties, though there are strict guidelines in place. Since FHA loans were meant to help homeowners finance a property that they intend to occupy, you can only use an FHA loan with a turnkey property if you are refinancing an existing loan. The FHA allows an FHA loan to be refinanced with another FHA loan, even if you are no longer living in the home and it is occupied by a tenant. The FHA loan also allows its loans to be used to finance the purchase of a duplex with two to four units, so long as you are living in one of them.