Millions of Americans invest in the stock market, but not nearly as many invest in real estate. There are many reasons for this, but one of the biggest is investing in real estate has more upfront costs. After you decide on buying a specific property, you usually need to obtain an investment property loan to purchase it, unless you decide to buy it with cash.
Compare Investment Property Loan Programs Online
Before pulling the trigger on real estate investments, it’s important to understand everything you can about investment property loans.
There are many types of investment property financing.
Borrowers need to secure approvals to buy an investment home or rental property.
If you don’t get the correct type of loan, it can affect your success in the real estate business.
Why Do People Buy Investment Properties?
There are many reasons that people invest in real estate. Buying properties can be a hedge against stock market volatility, and there are many advantages of owning properties.
For example, you can use an investment property for regular cash flow, flip it for a profit, or buying and holding for property appreciation. When you buy, you could have the money to buy it outright, but many investors still choose to finance and leverage their available capital into more properties.
Get a Traditional Bank Mortgage
If you own your own home, you probably know about regular mortgages. Conventional mortgages usually adhere to standards set by Fannie Mae or Freddie Mac. Or, you may have a government-backed mortgage from the FHA, VA, or USDA. Most regular mortgages require at least 3-5% down for owner-occupied homes, but sometimes 20% down for the best rates. For investment properties, expect to need at least 20% or 30% down. Check today’s rates on second home loans.
With a regular mortgage, your credit score and history largely dictate if the loan is approved. The lender will also review your assets and income, and you have to show you have enough money coming in to pay the mortgage.
Your future rental income will not be considered to qualify you for a conventional investment property loan, and you may need several months of cash reserves to quality.
Not every lender will do a conventional mortgage on an investment property. The rental property will need to be in good enough condition that it is approved for the loan. Not every investment property will qualify. If not, you will need to look at additional options.
Hard Money Loan
A hard money loan is only for the short term. Most investors use hard money loans for flipping properties, not holding them. Interest on hard money loans can be up to 15% or even 18%, and you will need to put down at least 20% in most cases. You use the hard money loan to buy the home and rehab it, then usually, sell it. The lender is paid off with the proceeds and you keep the rest.
Many experienced investors use hard money loans to buy and flip properties, even if they have the cash to buy the house outright and renovate it. Hard money loans are largely based on the value of the property and not the buyer’s personal credit. But having good credit could get you a better rate and make it easier to get financing.
Hard money lenders have various criteria for whether they will lend on a property or not. Much depends on the location, crime rate, amount of rehab needed, and the after repair value. The more upside the property has, the more likely the lender will let you borrow to rehab it.
Once the house is rehabbed, you can sell it for a profit or try to get a conventional mortgage on it for a buy and hold.
Hard money isn’t cheap, and there are origination fees and other expenses, but these short-term loans of six months to a year can be used effectively for buying investment properties.
Home Equity Financing
If you own a home, another option for buying investment properties and holding or flipping is home equity. When you have a lot of equity in your home or investment properties, you could pull some cash out with a home equity loan or home equity line of credit (HELOC). These are types of second mortgages that allow you to pull out cash while keeping the first mortgage intact.
Home equity loans and HELOCs are easiest to get on your personal residence. Some experienced investors can get second mortgages on investment properties if they have a good track record. Rates for investment property second mortgages are higher, and you’ll probably need more equity in the property than for personal residences – at least 30%. Many real estate investors also use their investment property to take out a HELOC and buy another property.
Private Money Loan
A private money loan is usually an investor’s personal money that they lend out to qualified borrowers. Some private lenders only loan to people they know well, such as friends and family. If you don’t have people with that kind of money in the family, you may attend real estate networking events to find people who loan private money.
Private money loans aren’t heavily regulated like the regular mortgage industry. You could pay a variety of interest rates for various terms. Most private money lenders only lend to experienced investors with a strong track record.
Credit Cards
If you have excellent credit and a high credit line, you could even use a personal or business credit card to buy and rehab certain properties. You might qualify for a zero interest credit card for a year or 18 months, renovate the home, and either sell it or get a conventional mortgage.
Highlights on Investment Property Loans
There are many options for investors who want to get an investment property loan. Generally, secured loans, such as HELOCs or home equity loans, offer the lowest rates. If your property is already rehabbed, you may be able to get a conventional mortgage on it with a relatively low rate (but higher than for an owner-occupied home).
Hard money loans may be the best option if you want to rehab the property without risking another property with a second mortgage.
Our loan professionals can review your loan needs and finances and help you determine which loan is best for your needs.
