Anyone who has purchased rental property will probably tell you that the first one was the trickiest. It can be confusing trying to navigate the options available and figuring out how to buy a property you don't intend to live in, and the rules for rentals are different than those for your primary residence.
So how do you buy rental property?
The down payment will be higher on a rental property mortgage — up to 25 percent. Interest rates on the loans are higher, too.
One of the best ways is to use your home to buy the property.
Consider some of these options:
* Use a HELOC. HELOC stands for home equity line of credit and it involves borrowing against your home's value. As the name says, you receive a line of credit and draw against it, making payments only on what you borrow. You can usually borrow up to 80 percent of the equity and you will likely have limitations on what the funds can be used for. HELOCs have variable interest rates.
* Cash-out refinance. A cash-out refinance pays off your existing first mortgage and gives you a new loan with a new payoff schedule. You receive a lump sum when you close the loan, and you can use the funds as you'd like.
* Home equity loan. A home equity loan is different from a cash-out refinance in that it is a second mortgage. People often look to these for remodels or to cover college costs.
* Commercial real estate loan. These will require more scrutiny of your business and its history as well as the property itself, so be sure to consult with a commercial real estate expert on this option. Also be aware that properties of more than four units are considered commercial properties instead of residential.
