If you own a rental home long enough you are guaranteed to run into a repair or capital improvement that may be leaving you wondering if the best solution would be to use your cash reserves or look into financing options. Traditional financing options are to refinance the property, use a HELOC on your primary home to finance the repairs or use credit cards. However, there’s another option which is to work with the vendor or the vendor’s lender for financing. The two most common categories that can lead to big ticket prices are with Plumbing & HVAC. On the plumbing side you may have the need to do a Re-Pipe or Re-Drain. With HAVC you may have to replace part or all of your system such as the Condenser, Furnace & Ductwork. Depending on the property and scope of work these could be well over $10,000 which can drain your cash reserves. We will explore some options using an example of financing $10,000 and $20,000.
FINANCING OPTIONS
The following two options may be offered by the vendor or vendor’s lender.
- Option 1: Vendor Financing
- Depending on the vendor being worked with, the vendor may offer an in-house financing option of 3 – 12 months as Same-As-Cash where they will charge 0% in interest so long as it’s paid within the term being offered. Though a vendor can, most of the time a vendor will not require to pull credit in offering this option.
- Option 2: Vendor’ Lender
- The vendor may work with a lender such as Synchrony which is an institution that offers financing. To obtain this option the vendor’s lender will require a formal credit application in which the credit will be pulled, and the lender will review the debt-to-income ratio. The interest rate offered will be subject to the credit rating. Though there can be many financing options, the following two are the top two most common ones:
- Five Year:6.99% subject to credit approval
- Ten Year:9.99% subject to credit approval
- The vendor may work with a lender such as Synchrony which is an institution that offers financing. To obtain this option the vendor’s lender will require a formal credit application in which the credit will be pulled, and the lender will review the debt-to-income ratio. The interest rate offered will be subject to the credit rating. Though there can be many financing options, the following two are the top two most common ones:
5 YEARS | 6.99% | 9.99% |
$ 10,000 | $ 197.96 | $ 212.42 |
$ 20,000 | $ 395.93 | $ 424.84 |
10 YEARS | 6.99% | 9.99% |
$ 10,000 | $ 116.06 | $ 132.10 |
$ 20,000 | $ 232.11 | $ 264.19 |
CONCLUSION
With operating a property as an investment, sometimes having larger cash reserves may be optimal therefore utilizing financing options may be in an owner’s best interest. The above options are meant to give an owner options to evaluate if and when needed.
