Best Ways to Fund or Finance an Investment Property

Securing the right financing allows you to take advantage of investment opportunities, reduce the amount of loan interest you have to pay. It also helps you maximize returns while managing risk. 

Conventional Bank Loans

Obtaining a conventional loan from a bank or credit union is a common financing method. These loans often offer competitive interest rates and terms, especially for borrowers with strong credit histories. For investments, a 20-25% down payment is required. Obtain pre-approval to streamline the buying process.

Home Equity Loans or Lines of Credit (HELOC)

Leveraging the equity in your existing property can be an affordable way to finance a new investment. Both home equity loans and home equity lines of credit (HELOCs) allow homeowners to borrow against the equity in their homes. Amounts are based on the difference between the home’s market value and the balance remaining to be paid on the mortgage. Both financing types use the home as collateral, but they have key differences. 

A home equity loan provides a lump sum payment, with a set interest rate and repayment terms. This type of loan is suitable for a one-time, large expense. On the other hand, a HELOC allows you to withdraw funds, as little or as much as you like, up to your limit. The interest rate will be variable. HELOCs are ideal for ongoing or unexpected expenses.

Home equity loans and HELOCs typically have relatively low interest rates as the loan is secured by the equity in your home. Carefully assess your home’s equity and borrowing capacity before deciding on this option, as it can create financial risk surrounding your home.

Private Lenders

Private lenders can provide quick financing solutions, often with more flexible terms than traditional banks. These loans are typically based on the property’s value and your ability to repay, rather than the credit requirements banks use. Thoroughly vet private lenders and ensure you understand all of the terms, including interest rates and repayment schedules, before proceeding.

Hard Money Loans

Do you need money quickly for a short-term purpose? Hard money loans are short-term loans secured by real estate, often used for property flips or renovations, and not offered by banks or other traditional lenders. They have higher interest rates but allow quick access to funds. They are generally only beneficial for short-term projects where the higher cost of borrowing is offset by the property’s quick turnaround or value increase.

Crowdfunding

Crowdfunding platforms allow investors to pool their resources and invest in larger properties or projects. This can enable you to take advantage of high-quality investment opportunities with lower capital requirements. Make sure you understand the platform’s fee structures, investment minimums and project types to find the best fit for your goals.

Seller Financing

This flexible option, in which the property seller acts as the lender, is useful for buyers who may not qualify for traditional loans. Interest rates and repayment schedules are negotiated directly with the seller.

Joint Ventures and Partnerships

Partnering with other investors can help spread the financial burden and risk. Joint ventures and partnerships allow you to combine resources and expertise to finance larger or more complex properties. Be sure to clearly define roles, responsibilities and profit-sharing arrangements in a formal agreement to avoid conflicts.

Real Estate Investment Trusts (REITs)

Investing in a REIT offers a way to gain exposure to real estate without directly purchasing property. REITs pool money from multiple investors to buy and manage income-producing real estate. Publicly traded REITs offer liquidity and ease of access, while private REITs tend to provide potentially higher returns but less liquidity.

Government Programs and Incentives

Various government programs may be available, offering financing options and incentives for property investors, such as the MLI Select program insurance incentives or the Affordable Housing Fund, which are offered by the Canada Mortgage and Housing Corporation (CMHC).

Savings and Personal Investments

Using personal savings or liquidating other investments can provide a straightforward and interest-free way to fund a property purchase. This option avoids the complexities and costs of borrowing.

Be careful, however, with this option. Maintain a diversified investment portfolio and adequate emergency funds to maintain financial stability.

With any financing option, be sure to conduct thorough research and due diligence to ensure the terms are favourable and your interests are protected. Also, be sure the investment will still be profitable after loan interest is considered.

Speak to a financial advisor to explore and assess financing options that best suit your needs. And, when you’re ready to purchase an investment property, connect with an RLP InvestorsEdge™ professional. They can guide you through every stage of the process, with the tools, insights and strategic support you need.