Thinking about investing in Los Angeles real estate, but you’re not sure how you’ll fund that investment?
The bad news: LA rentals are expensive. You’ll need to show up with some money in hand if you want to compete.
The good news: there are lots of different ways to finance your investment. It doesn’t have to be just one way.
As Los Angeles property management and real estate experts, we enjoy talking with new and experienced investors about how they’ll finance their first or their next rental investment. We know this is an exciting and sometimes intimidating market. LA has diverse neighborhoods, strong rental demand, and impressive return potential.
With a high cost of living and competitive housing market, accessing the right financial tools is crucial.
Here’s what you need to know, and why financing is so important when you’re investing in Los Angeles.
The short story is this. You’ll have to prepare for high entry costs, strict lending standards, and market volatility. But, there’s a lot of potential, too. Rents are high. Appreciation is likely. And, properly financing your project can mean the difference between a profitable investment and an uphill financial struggle.
Financing Options for LA Rentals
When it comes to funding your rental property, we can tell you what some of the best financing options are for most investors. Your financial situation and your investment goals are unique, however, and you’ll need a customized approach to how you pay for your investment. For now, let’s look at the key considerations involved in some common (and not so common) financing options:
- Traditional Mortgages
For many real estate investors, a conventional mortgage loan is the first and safest option to explore. These loans typically offer lower interest rates with fixed monthly payments, making it easier to budget. Investors gravitate towards the traditional mortgage because they’re a known entity. You likely used this type of loan in order to buy the home you’re living in yourself.
Here’s what you need to know about the conventional mortgage:
- Higher down payments are often required for investment properties. Plan on having at least 20 to 25 percent of the home’s cost as a down payment. That’s a lot of cash, especially when you consider the average price of properties in LA.
- Loan approval might depend on your credit score, income, and debt-to-income ratio. Preparation will help you get to a speedy and favorable decision. Clean up any credit issues, make sure you can demonstrate that your assets exceed your liabilities, and approach lenders with a favorable risk profile.
- May not be the fastest option for competitive markets where cash offers dominate. Things move quickly in LA. If you’re held up waiting for the right approval, you could lose out on a deal.
- Portfolio Loans
Portfolio loans are specifically designed for investors managing multiple rental properties. This financing tool is a great option if you find yourself needing to fund multiple properties under one loan. It allows you to bundle your investments into one loan for simplicity and better loan-to-value (LTV) ratios.
The investors we work with gravitate towards this lending tool because they’re often more flexible with credit requirements. This means that the interest rate might be higher, and the perceived risk is higher, too.
- Hard Money Loans
Hard money loans are short-term financing options typically issued by private lenders. These loans are ideal if you’re looking to close quickly or fund a fixer-upper property. They’re not going to work for every investor, however, thanks to the short repayment term that often comes with hard money lending. There will be higher interest rates as well.
This type of financing deal is best for experienced investors who can quickly renovate and flip or refinance.
- FHA and VA Loans
These government loans are also a good option, but only for a specific sort of investor.
If you’re planning to live in one unit of a multi-family property, Federal Housing Administration (FHA) or Veteran Affairs (VA) loans could be an option. These government-backed loans allow for lower down payments. There are lower barriers to entry and minimal down payment requirements. For an FHA loan, you can put down as little as 3.5%, which is great in a pricey market like LA. Just remember that owner-occupancy is required. Obviously, this is not ideal for investors who are planning to rent out an entire property.
- Private Investors or Partnerships
Partnering with private investors or securing funds through partnerships can provide the capital needed with fewer restrictions than traditional loans. Here’s what you need to think about:
- Agreements need to be clearly documented to avoid conflicts.
- You may have to share equity or profits with your partner(s).
- A great choice if you lack upfront capital but have strong expertise in managing rental properties.
- Cash-Out Refinancing
If you own equity in other properties, a cash-out refinance can help you tap into that equity to fund a new purchase. This may affect the mortgage terms of your current properties, but it could help you avoid taking out an entirely new loan.
We believe the cash-out refinancing option is best for experienced investors who already own high-value properties.
Key Considerations for Investors
If one of those options seems like the best path forward, here are some of the things to be prepared for as you take the next steps.
- Loan Terms: Understand repayment timelines, interest rates, and potential penalties or restrictions.
- Market Trends: Research LA’s rental demand in specific neighborhoods. Areas like Santa Monica might have a higher ROI for luxury units, while Echo Park could be ripe for affordable rentals.
- Tax Implications: Financing decisions can have tax consequences. Consult a tax advisor to maximize deductibles.
- Exit Strategies: Have a plan for refinancing, selling, or paying off the loan if the market shifts.
Work with experienced professionals who understand LA’s real estate and rental markets, such as mortgage brokers, real estate agents, and property managers. The guidance you’re likely to get from us and people like us can save you time and money in the financing process.
Let’s talk about how to best position yourself for financing your LA investment property. We’re the experts you need. Contact us at Earnest Homes.
