Investing in an income-generating property is a wise move, but it could also be a headache, especially when you did not make the very first step correctly. And that first step would be choosing the right kind of loan to finance your investment property.
There are different loan options available to back you up with your investment property. Some examples are personal loans, mortgage loans and business loans. But acquiring the one that does not suit your capabilities and financial goals can impact the success of your business. So it is essential to understand your options before taking the leap.
An investment property is simply a property that you purchase to generate passive income and return of investment in the long run. If you do not have a hefty amount of cash on hand to fund such a huge investment, then taking out loans is the way to make it happen.
In this article, we will be giving you some investment property loan options to help you determine the best choice for your investment.
Conventional Bank Loans
Unlike the non-conforming loans, a conventional bank loan is not backed up by the federal government. Borrowers are required to have at least 30 percent down payment since this type of loan does not provide property mortgage insurance (PMI).
To qualify for a conventional bank loan just like personal loans, borrowers should also have a good credit score, credit history, and a low loan-to-value ratio. It is also required to have a sufficient amount of cash to cover at least six months of your investment property loan. Conventional loan typically ranges from $45,000 to $2,000,000.
Cash out refinance investment property is another way to your road to getting passive income. With a refinancing, you can borrow up to 80 percent of your home’s equity to be able to fund your investment property.
Home equity loan for investment property could be considered as the second mortgage but requires a higher interest rate than your first mortgage. Just like any other loan option, cash out refinance investment property has its highlights and drawbacks. You can enjoy a fixed-rate loan but also have a longer mortgage term.
The decision to refinance should not be made lightly but is a great option for those looking to secure funds quickly. However, you could choose to take out a loan on a buy to let property instead which will be calculated on its rental income. When you haven’t got the entire immediate funds, you can opt for a buy to let mortgage to streamline the process, RWinvest talks about this in their guide to getting started in property investment.
Flipping or the strategy of buying an asset and eventually selling it for a quick profit is one of the ways to fund your investment property. Real estate flipping can be categorized into two: fix-and-flip and quick flip.
Fix-and-flip is the process of purchasing the unit, applying necessary repairs and improvement and selling a house with a little profit. On the other hand, a quick flip is a strategy of the investor to purchase the property, research for the buyer’s choice of property and apply it during home improvement, and sell it for a more significant profit.
Just like cash out refinance investment property, the fix-and-flip loan also has a drawback. The only downside of this type of loan is that it will surely cost a lot of money for repairs and renovation. The interest rate can also be at least 18 percent, which will depend on your lender and the timeframe set for you to pay the loan. There are number of flip insurance options available in the market.
Also called ‘hard money loans’, fix and flip loans are ultimately short-term loans for real estate investors that know how to execute high ROI renovations. This allows the investor to make a healthy profit when the property is sold, and pay back the loan in full, using the proceeds from the sale of the house. Of course, investors do have plenty of other options when it comes to their loans, as not everyone will be suited to a hard money loan. For example, those looking to grow their portfolio whilst still paying a mortgage on a previously acquired property might want to consider looking into a DSCR loan as a way to help them finance their next purchases. If the rental income from a property is enough to cover the mortgage payments on that property, they will likely be able to access this particular type of funding.
Investing your hard-earned money through investment property might be risky, but it is a wise financial move as the return will surely be worth it. With the right research and help of professionals, finding the right investment property loan option will be a success.