How to Buy Your Next Rental Property

Rental Properties in the Pacific Northwest

Are you in the process of purchasing your next rental property? Real estate investors have various financing options to make that sale happen, including but not limited to 1031 exchanges, owner-carry contracts, and conventional financing. 

In today’s article, we’re going to explore the three options in more detail to help you figure out which avenue might be right for you.

1031 Exchange

What Is a 1031 Exchange?

A 1031 exchange is the process of selling one investment property and using the proceeds to buy a similar one. If you go the 1031 exchange route, the properties must be “like-kind,” which means being similar in type of use, regardless of whether they have a different value or quality.

First, you get set up with a 1031 exchange company, and they facilitate the sales contract and other documentation. Once the initial property is sold, they hold the funds for the exchange. You have 45 days to find a new property after the first property sells. The exchange must be completed within a 180-day period from that original sale.

The main advantage of 1031 exchanges is the ability to defer capital gains taxes.

When to Do a 1031 Exchange

  • You want a tax break on the sale of your property.
  • You want to diversify your portfolio with a new property that may yield a higher potential ROI.
  • You want to relocate to an area with a more promising real estate market.
  • You can find a new property within 45 days.
Pacific Northwest Rental Home

Owner-Carry Contract

What Is an Owner-Carry Contract?

In an owner-carry contract (also called owner or seller financing), the owner plays the bank so to speak. While traditional financing involves lenders or banks to help an owner acquire a loan, owner-carry contracts are different in that the owner agrees to hold the note, and the buyer pays the owner over a set period with interest.

There are many benefits of owner-carry contracts, including finding more buyers who don’t qualify for financing (could be the case due to self-employment and write-offs), selling or acquiring the property quicker, and deferring taxes by spreading out the capital gains over time.

When to Do an Owner-Carry Contract

  • The seller or buyer can’t get financing for some reason.
  • You have a real estate attorney who can help you draw up the necessary paperwork.
  • You want to buy or sell quickly.
  • You want to spread out your capital gains taxes over time.

Conventional Financing

What Is Conventional Financing?

Conventional financing refers to a loan that is not done through the government, contrary to VA, FHA, and USDA loans. As a real estate investor, conventional financing is a great option. Government-backed loans have various rules and restrictions (e.g., you can’t have multiple FHAs at the same time). There are a lot of requirements for properties, which is why conventional financing is the preferred option for real estate investments.

Some of the benefits of conventional financing are that you use rental income to eliminate your mortgage and pay it off early if desired. You can also use that rental income to qualify for buying additional properties. For instance, let’s say you own two properties and want to buy another. You have two years of rental income history for the other properties and can use this to help buy your third property.

One last consideration with financing is to have a reserve. For many loan programs, banks will want to make sure you have so much in reserves, generally a few months, for each property.

When to Do Conventional Financing

  • You want a good interest rate for the loan.
  • You have a good credit score and income history.
  • You have enough for a down payment of 20%-25%.
  • You want your property rental income to help pay off your mortgage.
Homes in the pacific northwest

Conclusion

We hoped you learned something about financing for investment properties. If you’re interested in conventional financing for a property in Portland or a surrounding city, our friends at Fairway Mortgage can assist you.

Need property management services for your investment property? Contact Evergreen Property Management today! We’re here for you!

We wanted to give a special thanks to Jason Pittman of Fairway Mortgage for your help with this article. If you’re looking for an experienced loan officer in the Portland Metro area, contact Jason at 503-250-2443 or jason.pittman@fairwaymc.com.

Jason PittmanJason Pittman
Loan Officer
NMLS# 1367908

204 E Historic Columbia River Highway, Suite 240
Troutdale, OR 97060

Cell # 503-250-2443 | eFax: 1-866-290-5349