During the height of the economic crisis, a lot of people were hesitant to invest in real estate as a result of the housing meltdown. Fortunately, this stage has passed and the industry seems to be making a comeback. Today, you can easily buy in a down market and make a huge profit. But of course, you need to do your research depending on the type of investment you’re planning to make.

A good rule of thumb to follow before investing in real estate is that you should have an excellent credit rating, and you should feel financially secure. This way, even if you unfortunately experience some downsides to your investment, it wouldn’t have that much of an effect in your life. The upside is that you’ll earn a significant profit; you’ll consider real estate investment as a lucrative main or side business venture.

Now, the one problem you’d have when dabbling in property investing is where you’ll get the funds you need. How are you supposed to finance your real estate investing venture? Here are the top five ways on how you can do just that:

1: The Traditional Way

You need to have a solid credit rating and be financially stable before trying to invest in properties. The traditional way to finance real estate investments is to borrow money from banks, credit unions, home mortgage companies, and other financial institutions. Most of these have a high credit score requirement. You also need to provide a full documentation of your income and debts, and you need to shell out at least a 10% down payment. Overall, this is one of the safest and most well-known methods of financing real estate investments.

2. The Lease Option

An unfamiliar yet still suitable form of financing investment properties is the lease option. It allows you to own property for little or even no down payment. Within two or three years, you can be given the right to purchase the property while you’re still looking for financial backing. It can also be arranged that a percentage of the monthly lease payment goes towards the balance of the cost of the property.

3. Through Seller Carry Back

Also called buying on terms or creative financing, seller carry back refers to any method of financing aside from the traditional one. This is a good way for investors to use as little of their own money as possible, where sellers usually agree to carry the note of your purchase.

4. The Seller Second

For this, the seller provides a second mortgage and cash flow notes are usually involved. For example, if you’re pre-qualified for a loan which requires you to shell out 20% down payment, an offer can be made so that the seller can carry a cash flow note for 20%. The one thing you need to check when going for this option is that the loan you’re qualified for should allow a second mortgage attachment. Although there are some loans where this is a possibility, seller seconds are not allowed in most cases.

5. Using the Subject-To Method

Finally, you can go for the subject-to method which is a short-term solution for real estate financing. It means that the investment is subject to existing financing. When you purchase a property, one condition is that the existing financing stays in place. The title can be transferred but the loan will still be under the seller’s name, although the buyer is already making the payments. This financing is suitable for properties that are about to be foreclosed.

Real properties remain great investments in Australia, especially in the current buyers market. As an investment strategy, real property presents various advantages over other types of investments such as stocks, bonds and bank deposits. However, raising enough cash for purchasing investment property can be a challenge for beginner investors. Ideally, a financial planner or mortgage broker should be able to help a prospective buyer learn how to finance investment property.

Benefits of investing in property

Financial freedom: The right property investment coupled with the best financing arrangements can generate huge profits for an investor. These can be used to finance other investment properties that generate similar incomes sufficient to sustain the desired lifestyle of an investor.

Passive income: Property situated in populated areas such as major cities and tourist destinations can generate regular passive income in the form of rent or lease payments.

Capital growth potential: The value of property is historically known to increase much faster than the economy’s inflation rate. Properties in prime locations are known to appreciate in value at the minimum rate of 7% annually. An investor stands to earn higher profits from selling property held for a long period.

Control over value: Unlike other types of investment such as shares of stock, bonds and deposit accounts where an investor has very little control over their future values, property investment may be improved, renovated, subdivided, developed or consolidated to improve its market value.

How to finance investment property

Potential gains from an investment property depend on the features of its financing arrangement. Not all investment properties are purchased in cash. Investors generally put up a down payment and finance the remainder value using a loan or mortgage.

Mortgage loan: A mortgage is a loan where property, usually the property being purchased, is given as security for the loan’s repayment. Interest costs for a mortgage loan are generally lower because the collateral lowers the lender’s risk.

Home equity as deposit: Producing a down payment for a property investment can be a challenge for investors with limited cash. An option would be to use a property’s equity as deposit. Equity refers to the value of an asset that is not subject to any lender’s interest. In practical terms, it is the difference between the current value of a property and the amount due on a mortgage loan secured by it.

Lending companies provide different loan products with varying features such as interest rates and repayment schedules. Each financing arrangement has its own pros and cons. Aside from teaching you how to finance investment property, a mortgage broker or financial counselor can help you determine the best arrangement for your situation.

Many people would like to get into the world of real estate investing, but have many questions. While real estate can be a lucrative place to make money, history teaches us that it is also a place to go bankrupt. One of the most key questions that must be answered before entering into an investment property is, “how will I finance this property?”

Should I Finance At All?

Many people decide not to invest in real estate until they have considerable savings with which to do so. This leads them to question whether they should finance at all. While exposure to leverage can be dangerous, it is usually a necessary component to make real estate investing work. Real estate investing is keyed around appreciation and if an asset is appreciating, you would like to obtain it for as little cash as possible. If your property isn’t appreciating, then you have entered into a bad investment to begin with.

Seller Financing

Almost all bold claims about making a fortune in the real estate market are predicated on the notion of “seller financing.” In this model, the person who sells you their property accepts a small or no down-payment and allows you to make your monthly payments to them. This of course would be a great bargain, but it is very rare in the real world. While some people may be looking for an investment opportunity when leaving their house, most would rather put their equity into a more secure vehicle than loaning money to a stranger.

Realistic Financing

If you want to run realistic, reproducible financing numbers, it is best to assume you will have to put 20% down on your property. Banking institutions are immediately leery of lending money to real estate investors, but at that rate, even if you default they will probably make their money back. While this won’t allow you to achieve the kind of ludicrous returns many “Investment Programs” claim, it will put you in a leveraged position to make gains in a positive real estate market without over-extending yourself. Managing risk is an important part of any investment strategy.

There are many more considerations when considering investing in real estate. Much care and consideration should be invested before deciding to purchase property. While real estate can be a valuable part of a diversified portfolio, it is not a “get rich quick” scheme and requires careful planning.