Are you someone who wants to buy investment property, but you just can’t figure out how to finance your first buy? If so, this article is written for you. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free What follows are seven different ways to finance your first property. Before that, I’ll also share ideas to make sure this first purchase fits into your overall wealth building strategy so that you don’t waste time going down the wrong paths. To begin, you should know that every successful investor began right where you are. Just like the longest journey always begins with the first step, enormous real estate wealth begins with your first deal. I remember very well being a 23-year-old standing at the edge of my new venture into real estate, asking questions like: “How am I going to do this?” “How will I raise the money for my deals?” “Will the lessons I’ve learned actually work for me?” It’s normal to have apprehension and self-doubt before starting something important. But the anecdote for this ailment is a big spoonful of knowledge and another big spoonful of action. I’m going to give you my best in the knowledge department right here, and you’ll have to do your part by taking action on what you learn. Is that a fair deal? Now, let’s move on to financing your first real estate investment! Strategy Before Details: The 5 Wealth Building Stages Jumping into borrowing a lot of money against real estate before you understand the bigger picture is sort of like taking off in an airplane without knowing how to land. You may successfully get off the ground, but good luck trying to find your destination and land in one piece! Here’s the big picture of wealth building as I see it. The wealth you will build from real estate will allow you to have more freedom, more flexibility, and more time to do what really matters. You can call this financial independence, retirement, freedom, or whatever you want. It’s the peak of the mountain on your wealth building journey. To reach this financial peak, you have to build a large net worth (a.k.a. equity) so that you can eventually live off of the income from your investments and never have to trade hours for dollars again. But before you reach that final stage, there are other milestones you’ll pass as you climb the financial mountain. These intermediate stages are important because they determine your overall real estate strategy, which includes how to finance your deals. Related: Real Estate Financing: The 4 Best Ways Savvy Investors Fund Deals Here are 5 stages you’ll pass during your climb: Survival is the milestone when you’re earning some money and getting your bills paid. It’s also the place where you’re digging yourself back out of financial holes you dug in the past. Stability is like Dave Ramsey’s first three baby steps. You pay off personal debts, you have cash reserves in the bank, and you build job skills that are in demand and command a better income in the marketplace. Saver is the stage where you realize the importance of your savings rate and put it into practice. Building wealth is actually simple, but it’s not easy. You need to maximize your income, simultaneously decrease your spending, and set aside a lot of money. Below average wealth builders save 0-10% of their income, but above average wealth builders save 25%, 50%, and even 75% of what they bring in. The faster you want to reach financial independence, the more you need to save. Growth stage is where most of us think of investing. It’s taking your $50,000 nest egg and turning it into $1,000,000. The key is to maximize compounding by reinvesting earnings, buying good assets, and maintaining discipline. Income stage is when you already have a large chunk of equity and you’re ready to enjoy the fruits of your wealth-building labor. The objective here is to turn equity into regular income that gives you time, freedom, and flexibility. Which of the 5 wealth building stages above best describe you? Are you in survival, stability, saving, growth, or income modes? Don’t beat yourself up wherever you are. Everyone has to climb the same mountain, and the fact that you’re doing it now is all that matters. Once you know your stage, it will help you begin focusing on a real estate investment strategy. Choose a Strategy Before Your Financing Your real estate investment strategy and your financing are closely connected. You’ll be in trouble if you just walk into a bank and say, “I want a loan so I can buy investment real estate.” A strategy is your decision about which part of the real estate universe will best help accomplish your financial goals right now. You can invest in fix and flips, house hacks, mobile homes, commercial buildings, private notes, and much more. But you can’t do them all at the same time on your first deal. So, a strategy is about focus. It will help you get the right financing on your first deal. If you’re working on wealth stages #1 or #2—survival or stability—keep in mind that you need a job or a side business more than you need investing. Investing takes your cash, and you need to put more cash in your pocket right now. I wrote in more depth about 7 ways (other than wholesaling) to make money in real estate as a newbie. Most of these don’t actually include you borrowing the money because other people will buy your deals, but you’ll learn a lot about financing in the process. If you’re working on wealth stage #3, saver, it can make sense to begin purchasing and financing investments. Real estate is a great forced savings plan. Many people say it’s bad that real estate is illiquid or hard to sell. I say it’s GOOD. You’re forced to leave it there and not spend it! If you’re in this stage, a great place to start is with house hacking or live-in flips. You have to live somewhere, so why not multi-task and make your investment a savings tool? Owner-occupant financing programs like FHA or VA, which I’ll explain more later, allow you to get into properties with less down payment. You could also get into house flipping and rental properties at this stage, but because you lack sufficient savings, you’ll need to leverage the down payment and reserve money of partners or private investors. This is exactly what I did early on. Related: Newbies: You Should Focus on Your First Deal And Nothing Else. Here’s Why. If you’re working on stage #4, growth, you should have the credit, income, and capital to jump into real estate investing in earnest. You could focus on the strategy of fixing and flipping houses, renting small residential properties, buying high cash flow rentals like mobile homes, or moving into one of the many other smaller niches of real estate investing. In the section below, I’ll share some basic ideas below for how to finance your real estate with any of these strategies. For stage #5 investors, the goal is typically not to leverage up but to deleverage. At this stage, income is a higher priority than maximum growth. You may still choose to have some financing, but I’m guessing if you’re in this stage you’ve already figured out most of the ideas I’m sharing here. So, you’ve got your stage in mind, right? You have a basic idea of your strategy, and you’re ready to get started. Now let’s begin unpacking the different possibilities to finance your first investment property. 7 Types of Financing for Your First Investment Property Below are seven solid types of financing for your first investment property. For each financing type, I will tell you: What it is The good The bad Who can use it (i.e. owner occupied, non-owner occupied, 1-4 units, or any property) Possible investment strategies with this financing type (i.e. house hacking, live-in flips, rentals, etc.) Where to find this financing Further reading for you to learn even more If one or more of these financing types sound interesting to you, I recommend making it the primary focus of your education and your follow-up questions in the BiggerPockets Forums. That focus will help you become more competent and confident as you work on your first deal. Here are 7 possible types of potential financing for your first investment property. 1. FHA (Federal Housing Administration) Loans What it is: These federally subsidized loans generally have lower down payment requirements (3.5% as of 2016) and easier qualifying standards than other loans. They also have low, fixed interest rates for 30 years. The Good: Easier to qualify, attractive terms. The Bad: Fees can be higher than other programs, the closing process is not fast — typically limited to one deal at a time, major fixer properties won’t qualify. Who can use it: Owner-occupied only. Investment strategy: Good for house hacking or live-in flips, 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: Check out this article on buying a duplex with an FHA loan to learn more details about this program. 2. VA (Veterans Administration) Loans What it is: These are also federally subsidized loans only for U.S. military veterans. The terms of these loans are usually the same or even better than FHA, including a 0% down payment. The Good: Easier to qualify, attractive terms, multiple loans are possible. The Bad: Like FHA, closing process is not fast, and while multiple loans are possible, there is a limit based upon your maximum entitlement; major fixer properties won’t qualify. Who can use it: Owner-occupied only. Investment strategy: Good for house hacking or live-in flips, 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: For more details on VA loans and using them to buy investment properties, read VA Loan: The Real Estate Investor’s Guide to Eligibility and Funding. Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed. 3. Conforming Loans What it is: Conforming means the loan conforms to the rules and guidelines of mortgage giants Fannie Mae and Freddie Mac. While the requirements are a little more stringent than FHA or VA, conforming mortgages are still a great mortgage product for investments. Although 20% down or more is the standard for non-owner occupied loans, programs do exist for 5-10% down payments on owner-occupied loans if you hunt around. The good: Attractive terms with low interest over 15-30 years, faster qualifying than FHA/VA. The bad: Larger down payment than FHA or VA, limited to 4-10 loans; major fixer properties won’t qualify. Who can use it: Owner-occupied OR non-owner occupied. Non-owner occupied typically requires more money down, higher interest rates, and other more stringent requirements. Investment strategy: House hacking, live-in flips, rental real estate; 1-4 units only. Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders. Further reading: Read this BiggerPockets article to learn more about qualifying for a conforming loan. Also, check out the Eligibility Matrix (8/30/16 version) put out by Fannie Mae to describe their requirements for borrowers. 4. Portfolio Loans What it is: Portfolio loans are kept by the bank or lending institution that made the loan, unlike conforming loans which are sold to Fannie Mae, Freddie Mac, or other mortgage investors. This means the requirements and loan terms vary depending upon which lender you use. This was how I financed my very first deal, which was a fix and flip property. The good: More flexibility, potentially larger number of loans than conforming, possible to get loans on fixer-uppers and commercial. The bad: Terms are not typically as good as FHA, VA, or conforming loans, you may have balloons in 3-7 years and/or adjustable interest rates, credit and down payment requirements more strict than FHA or VA. Who can use it: Owner-occupied or non-owner occupied; 1-4 units, multi-units, commercial. Investment strategy: House hacking, live-in flips, rentals, fix-and-flips. Where to find it: Banks (especially local ones), savings and loans, credit unions. Further reading: Brandon Turner wrote a good article about how portfolio loans transformed his business. There are also many threads on the BP forums. 5. Hard Money Loans What it is: These loans are asset-based loans, meaning the primary concern of the lender is the property serving as collateral. The individuals or small groups that make these loans are in the business of lending, so they can usually move fast, which makes them attractive for purchasing investment deals. The good: Fixer-uppers are OK, technically no limit to number of deals, can often borrow all or part of repair costs. The bad: High interest rates and other costs, may not loan to brand new investor who has no experience with real estate, typically short-term loans. Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial, land. Investment strategy: Fix-and-flip, rental property (for purchase, will need to refinance). Where to find it: BiggerPockets has a hard money lender directory. You can also usually find several lenders at your local real estate investor association. Further reading: BP founder Joshua Dorkin wrote a good overview of hard money loans and BP Podcast #9 was about the subject. This article gives “8 Things the Experts Won’t Tell You About Hard Money.” Related: How I Find Private Money Lenders to 100% Fund My Deals (& How You Can, Too) 6. Private Money Loans What it is: Private money lenders are individuals or their self-directed IRA accounts who make loans against real estate. Unlike hard money lenders, these individuals aren’t usually in the business of lending. The good: More flexibility and faster closings than bank mortgages, potentially lower interest rates and costs than hard money lenders, potentially longer length of terms, and often lending relationships that last for years or decades. The bad: You can’t walk into a bank and ask for private money. It’s usually a result of relationships with other local investors built over time. Because these investors aren’t in the business, there is usually a limit to the number of loans based upon their available funds. Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial. Investment strategy: Fix and flip, rental property. Where to find it: Networking online (like BP Forums or Marketplace) or at local real estate associations or business meetups. Further reading: This area of financing is my expertise. I wrote about multiple sources of private money and my first BP podcast interview discussed how I got started with creative financing. You can also check out this private money guide from Ankit Duggal. 7. Seller Financing What it is: Seller financing means the seller of a property accepts all or part of the purchase price in monthly installments. Unlike a bank, the terms are completely negotiable. The final result is just what works best for both you (the buyer) and the seller. The good: Typically great interest rate and terms, small down payment is possible, no credit or formal approval process. The bad: Requires negotiating skills and knowledge of real estate finance and contracts, not every seller has enough equity to seller finance and many with equity want cash (at least initially), you will need to fund your own repair costs. Who can use it: Owner-occupied or non-owner occupied; any type of real estate. Investment strategy: Best for rental property or house hacks; also works occasionally for fix and flips or live-in flips. Where to find it: Direct mail campaigns and other ways to generate leads directly from potential sellers; also possible through knowledgeable real estate brokers. Further reading: I wrote “Your Guide to Uncovering the Best Seller Financing Deals,” and Brandon Turner wrote the “Definitive Guide to Using Seller Financing to Buy Real Estate.” The Next Step is the Most Important Step In this article, you’ve learned about identifying your wealth building stage, focusing on a real estate strategy, and then choosing a financing source for your first deal. If you look at all of this information together, it could be overwhelming as a new investor. But the next step for you is not to learn everything. You don’t need to understand every single real estate strategy or financing source. You don’t need to worry about how you’ll do your second or third deals or how you’ll become a millionaire. You just need to understand one strategy and one financing source and then go do it. The next step in your real estate journey is the most important. Remember how I started this article? I said I’d share some information, and you’d take action. It’s that time for the action. The real learning happens when you try to apply what you’ve learned. Have fun and best of luck! [Editor’s Note: We are republishing this article to help out newbies who have started reading our blog more recently.] What financing source seems to be the best fit for you? What is your wealth building stage and real estate strategy? Is there anything I can help you with as you take action towards financing your first investment property? I look forward to hearing from you in the comments below.