Purchasing a rental property can be an excellent investment. Not only does it provide a store of value that can be sold at a later date, but it can also offer a stable source of revenue with a bit of work. Better yet, this revenue stream is mostly passive, requiring only some dedicated effort to get started and a bit of additional attention here and there afterwards. However, though purchasing rental property undeniably has significant benefits, it isn’t a cheap market to break into.

If you want to purchase your first property for rental use, or expand your existing property portfolio, you’ll need a good chunk of capital behind you. This is easier said than done, however; it’s unlikely that the average prospective property buyer has enough capital at hand, and not every method of raising finance is suitable. As such, the first obstacle to purchasing a rental property is finance.

In this article, we will break down the best methods of financing a rental property purchase, ensuring you can get your next investment underway.

Traditional bank loan

One of the most reliable methods of financing a property purchase, both rental and otherwise, is a bank loan. This method is a staple source of finance for any project, being a secure and straightforward practice. Bank loans can fund anything from a home purchase to an investment in business, and anything in between. Although there are many applications for a bank loan, obtaining one isn’t always easy. The application process can be rigorous, requiring exact identification, proof of income, business plans, and other such documents. While this might not be a challenge for experienced property buyers, newcomers to the industry may find their lack of experience to be an obstacle. As such, another form of finance may be more appropriate for beginner rental property buyers.

Also Read: Unsecured vs. Secured Loans

Private lenders

Similar to traditional bank loans, loans from private lenders can be used to finance rental property purchases. Plenty of private lenders would be willing to fund the purchase of a property, both for rental purposes and otherwise. The process of doing so is quite like traditional forms of finance, though with a few considerable differences. The most noteworthy differences include speed and ease of access to funds.

These advantages are due to the application process being slightly different from a traditional bank loan. Private lenders place less emphasis on your proof of income, credit history, and the like. Instead, most private lenders will ask for security before approving your loan application. This is often in the form of the property in question, though it can also encompass other assets. While this makes the application process much easier, it does force the borrower to assume more risk than with other forms of finance. If the borrower defaults on the loan, the lender is entitled to repossess the property as a form of repayment. As such, it isn’t an option to be taken lightly.

For rental properties, however, the risk is lessened somewhat. As rental properties provide a steady source of income for the owner, private lending can be used in the short term until another source of finance becomes available. For example, if your bank was unwilling to give you a loan because you had already tapped this source of finance recently, private lending can be a good alternative while waiting for your bank to lend again.

Also Read: What Is Alternative Finance?

Home equity loans

Leveraging your equity in an existing property can be an excellent alternative to using traditional or private lenders. This can be done in several ways; through a HELOC, a home equity loan, or cash-out refinance. While each type of loan has its advantages and disadvantages, they all follow a similar theme: using home equity to borrow money against. A HELOC, for example, works much the same as a credit card. With a HELOC, you will tap into the equity you have in a property as and when you need additional finance. Once you have done so, you will make monthly repayments, typically interest-only, exactly as you would with a credit card. The full debt can then be paid off at a later date.

Seller financing

The final option in this list is seller finance. It is a fairly alternative form of finance compared to the others mentioned, though it can be used to great effect. While perfectly useful in its own right, seller financing can be a lifesaver in cases when traditional or other private loans cannot be obtained. Moreover, it is a fairly straightforward form of finance, simply requiring the borrower to obtain a property loan from the seller of the property in question. Once a deal is struck, the property can be bought, and repayment to the seller can begin.

In addition to the relative simplicity of seller financing, it can also be significantly quicker and easier to complete than other types of loans. Once you’ve ironed out a loan agreement with the seller, progress is almost always much swifter than with a bank or even another private lender. The seller will provide a portion of the property’s sale price, or in some cases all of it, and transfer the property to you.

Naturally, this form of finance needs some serious planning behind it. You’ll need to persuade the property’s seller to essentially take payment over time, which can be a hard sell at the best of times. Without a thorough proposal, your chances of persuading the seller to even consider your offer are pretty much nil. As such, you should draw up a detailed contract for the seller, plus provide a specific plan of what you intend to do with the property and how you intend to repay. Bear in mind that this method won’t always be an option; sellers that want a lump sum payment likely won’t be interested in this form of finance.


Entering the rental property market can prove to be an excellent way to develop a passive income stream. Like any other venture, it does have its challenges, with one of the most notable being how to finance a rental property purchase. Thankfully, there are plenty of options available, once you know where to look. Provided you do your research, this obstacle can be quickly surpassed with ease.