There’s more than one way to pay for an investment property, and the right choice depends on the deal in front of you. Most investors use one of three approaches: cash, a bank mortgage or a hard money loan. Here’s how they compare.
1. Pay cash
If you have the capital, you can buy a property outright. Experienced investors sometimes do this on lower-priced properties, or when they’re confident they can turn a profit quickly.
Cash has clear advantages. There’s no interest, no lender approval and nothing to slow down the closing. Sellers like cash offers for that reason.
The drawback is that your money is tied up in a single property. And for many people, particularly those just starting out, paying cash simply isn’t possible. If that’s you, don’t be discouraged. There are other ways to get started.
2. Get a mortgage from a bank
You can finance an investment property much as a homeowner finances a house, with a traditional mortgage.
This works best if you plan to keep the property and rent it out. The interest rate is usually lower than other kinds of financing, and the long term keeps the payments manageable.
It’s a poor fit for a fix and flip, or any property you want to sell quickly. Bank approval takes time, and many banks won’t lend on a house that needs significant repairs. Think about the downside as well. Interest adds up over the years, and if you can’t keep the property rented, you still owe the payment every month.
3. Use a hard money loan
A hard money loan is short-term financing secured by the property. It’s often the best option when you need to move faster than a bank allows. Good investment properties tend to sell quickly, and waiting on a traditional approval can cost you the deal.
Because the loan is based on collateral, the lender puts less emphasis on your credit history and more on the property and your plan for it. Hard money can also act as a bridge. You use it to buy and improve the property, then replace it with long-term financing or pay it off when you sell.
The cost is higher than a bank loan, so it works best on deals with a clear, fairly short path to repayment. For more detail, read everything you need to know about hard money loans and our comparison of hard money, private money and mortgage loans.
Choosing among them
- Cash: fastest and cheapest, if you have it
- Bank mortgage: lowest borrowing cost, best for long-term rentals
- Hard money: speed and flexibility, best for short-term projects
Sachem Lending can help you work through the options for your project. See our loan programs or contact us today.
