Buying An Investment Property: Is it the right move?
Real estate is a good field to explore when it comes to investments. Despite this though, assessing the risks and opportunities it offers is necessary. If you’re set on buying an investment property though, there are different factors you need to consider. Rental property and real estate investment loans are available. If you are now ready to be a landlord, the first step is to learn everything you can about it. Learn details like investment property mortgage rates. First, though, determine if this is the path you want to go to. Let’s start with the very definition of what an investment property loan is and what it entails.
Defining an Investment Property Loan
An investment property loan refers to the mortgage used to buy a property to gain profit. It can be used to purchase investment properties and second homes. The property serves as an investment hoping to be a financial gain for the borrower.
Eligible properties range from single-family homes up to 4-unit properties. These properties can be funded through conforming loans. For homes with 5 units and more, there are also lenders and loan programs you can benefit from.
Once the property is purchased, borrowers can benefit from two types of returns on their investment. This can be rental income, appreciation in value, or both. Most investment property loans require 20% or more down payments for the best terms. Investment property loans with less than 20% down payment will require mortgage insurance.
Investment property loans that do not fit in the conforming category or do not qualify for conventional financing in other ways require alternatives. So before diving into this process, read on and learn more about it first.
What is an investment property?
An investment property is defined as a real estate asset bought solely to gain profit. The property may be acquired and owned by one of these:
- Individual investor
- Group of investors
While the loan is usually short-term, the investment property can be long-term. House renovation, remodeling, and flipping can also be included in the process. Most of these investment properties are not used as residences. They are used to gain income in the forms of rent, interest, and dividends.
If you are thinking about investing in real estate, loans will be helpful. Financing can make it more possible to invest in real estate. However, that leverage also makes investment properties riskier and less profitable. More about investment property and its factors can be explored here.
Before going to that though, there are three types of investment properties to consider.
What are the different types of investment properties?
The decision to purchase investment properties will depend on how you want to earn. You can resell the property in the future or gain income through rent. This is how it can either be a short-term or long-term investment.
The three types of investment are Residential, Commercial, and Mixed-Use. Learning about them and their differences will help you decide.
The residential investment property refers to rental homes. Residential properties fall under this type when rented out. When managed properly, it is a great way to produce extra income.
This investment property type can earn income from monthly rents. It is considered a long-term investment. You can get loans to finance these types of residential rental property. And this property can be one of the following:
- Single-family Homes
- Apartment Buildings
- Multi-family Units (Duplex/Triplex/Fourplex)
- Second Home/Vacation Home
A commercial investment property is an income-generating realty intended for a commercial purpose. It can be another great way to earn real estate income when managed well. After buying/renovating the property, your monthly income is derived from renting the property. You can also sell for a profit.
The renovation costs though can be higher than other property types. The rent and sale price of commercial property is also higher.
Mixed-use investment property is a realty used for both residential and commercial. This can happen for buildings with more than 1 floor.
The main floor is for commercial purposes like a restaurant. The upper floors are for residential lodging. The entire building though is a rental property where you can use loans to purchase.
Benefits You Can Enjoy
Buying an investment property is a serious decision to consider. Getting loans for real estate as an investment can be a good strategy, but it increases your risk and reduces your profit. The advantage is allowing you to purchase when you otherwise could not. Careful and thoughtful analysis of the risks and potential for a positive return will be essential before committing.
High Loan Limit
Compared to the conventional one, an investment property loan can accommodate a higher loan limit. Borrowers will have more flexibility in the price of the property they can buy. This high loan limit will give way to more options with the property you can buy.
Flexibility in Size, Type, & Number of Properties to Finance
With the high loan limit, you have more options when it comes to property types. This particular loan can accommodate different types of investment property you can consider. This has been discussed in the previous section.
It also offers the opportunity to fund multiple properties. In fact, if you have an existing investment property, the equity can be used for another loan.
Reasonable Interest Rate
The investment property mortgage offers reasonable interest rates. This is if you have a good credit standing. The loan will help you save a big amount you can use for other priorities.
Clear Standards in the Mortgage Application
An investment property loan application is more stringent when it comes to cash flow and property. The process is dependent on the loan program and the standards of lenders. The mortgage providers for this loan have clear standards by the numbers for their approval.
Offers Incredible Investment Power
Besides rates, the investment property mortgage can increase your buying power. This means you get to reap the benefits of the investment itself. You can even buy more properties with this.
With this great opportunity though comes a downside risk. You will need to pay stricter attention to the cash flow. The property’s profitability is reduced with monthly interest payments. It is easy to lose money each month and must be taken into consideration before deciding on it.
In buying an investment property, you increase your net worth. From there, you can start building it up after paying the loan off. You can increase your net worth when the property increases in value and the loan is paid down as planned. Here are other economic benefits you can enjoy from choosing this mortgage.
- Generates fixed return on investment with the stable property market
- Possible increase in property value
- Rental income is higher than mortgage payments plus operating expenses
The investment property loan is tax-deductible. It is considered an expense of owning the property. Income tax for the property will be calculated based on the net income, reduced by depreciation which a non-cash expense is thereby helping on taxes. At the end of the financial year, you can claim the following expenses:
- Management Fee
- Property Maintenance Fee
Using this investment mortgage offers many benefits to borrowers. And all listed above are only a few of what you can enjoy from the opportunity. However, it is also vital to consider the risks that come with the investment. Weigh your options and decide if the benefits are worth the risks that come with them.
Types of Investment Property Loans
Have you decided if you’re buying an investment property? If yes, make sure you know what choices to consider. For an investment property loan, there are several to choose from. Winner’s Mortgage has the formula for success and can help you out with this decision. To start, you must know what to expect.
Knowing what to look for and learning about the different types of mortgages you can use is vital. In choosing, it is crucial to consider your credit standing and financial status. Here are the types of these real estate investment loans to choose from.
Conventional Mortgage Loans
Conventional mortgage loans can be used when buying an investment property. In fact, they are considered the most common option for investment mortgages. It follows the standards set by Freddie Mac or Fannie Mae. These loans though are only for residential properties up to 4 units in a structure (single-family, duplex, triplex, fourplex).
A conventional mortgage is offered by banks and loan providers. Requirements depend on different factors, including the lender, loan program, and state. But down payment is crucial. Borrowers will highly likely be required 20% or more of the loan amount for a down payment.
Choosing conventional loans to fund your real estate investment requires more strict qualifying standards. You need a secure financial status, with at least a 620 credit score. For better investment property mortgage rates, you need at least 740.
When talking about investment in real estate, requirements for loans are stricter. Borrowers are expected to show at least six months’ worth of cash reserves. Since these requirements depend on the state you are in and the loan program, check with Winner’s Mortgage to get all the facts.
Private Lending for Investment Properties
When buying an investment property, choose mortgages from private lenders. Private lenders have more flexibility than other mortgage providers. It is not a clear-cut standard when dealing with private lenders.
Real estate investment can be costly, and loans can have high rates. Banks, mortgage brokers, and lending institutions may state high rates. With private lending, you can talk it out to the lender. You can negotiate the details and terms of the mortgage.
Private lenders’ loans can be an excellent option when buying a rental or residential property. You can turn to private lenders when turned down by other loan providers.
Home Equity Loans
You can use your home equity to purchase investment properties. These loans are an excellent option for a rental property with long-term income. Before deciding on this, consider your balance from your home mortgage and if the investment will be worth it.
Buying an investment property with home equity loans is possible. You might be approved for 80% of the equity value of your home. Property appraisal and credit check will be required before approval though.
If you choose the home equity mortgage, rates for this investment property are higher. It is considered a second mortgage. The good news is that it is tax-deductible. Consult dependable Winner’s Mortgage experts to learn if this is the right option for you.
Hard Money Lending
In hard money lending, loan providers are flexible. They offer more flexibility when providing funding amounts. You can also qualify for the mortgage considering you have a down payment or equity ready, excellent financial standing, and experience in real estate.
The catch when using this mortgage to buy an investment property is that the rates are higher. They also have higher costs yet shorter term, ranging from 6 months to 5 years. Funding is fast and instant with fewer requirements.
This is one of the most common loans for real estate property. Remember though that while it may be fast and flexible, it is short-term and have high rates and costs. This is one of the options you only choose when necessary.
Commercial Investment Property Loans
Commercial investment property loans are great for a rental venture. Application for the loan requires excellent credit standing and a good business plan. The terms for this mortgage are very specific.
A down payment is around 15 to 35 percent. The mortgage for this investment property ranges from 8 to 13 percent rates. It is short-term and last for 1 to 3 years.
Fix and Flip Investment Properties Funding Loans
This particular investment property loan is for house flips. Borrowers who wanted to profit by buying a property and rehabbing it. After the renovation, the property is sold for a higher price.
Through this mortgage, you can choose the properties you want for renovating and selling. This includes even renovations that banks would deny, including the following:
- Foundation issues
- Storm-damaged homes
- Roof problems
With the freedom and exceptions come higher investment property mortgage rates and costs. Funding might also be limited to the local area where the provider is.
While rental property loans are great for fixed income, you will have to deal with tenants. With house flipping, you get to earn profit without tenants to think about. It is necessary to provide proof though that you are excellent at flipping houses.
Mini Perm Loans
Mini perm loans are medium-term mortgages for rental property. They can be used for a commercial and mixed-use type of property. Funding will be provided and then held. A long-term fund will be approved after an excellent performance is shown.
This mortgage will need proof that the property chosen can generate income. This is the reason why the funding will be held. After the proof, the funding will then become permanent with great rates.
Bridge and Blanket Mortgage Loans
Buying an investment property with Bridge and Blanket Mortgage Loans is also possible. An existing investment property is needed for collateral though. The loans provide cash for a down payment. You can use it to purchase many properties with the same paperwork.
Lines of Credit
The Line of Credit is another flexible investment property loan you can choose. Rates and closing costs are excellent in a way that you can borrow the amount you need and pay them as fast as you can.
Home Equity Lines of Credit are the most common type. Loan amounts though are typically low for this kind of mortgage.
If you are serious about buying an investment property, these are the loans you can consider. With many types to choose from, it can be a bit overwhelming. Consulting Winner’s Mortgage experts is a great option to consider. You can’t fake authenticity and expertise.
Eligibility and Qualifications for Consideration
Real estate investment loans have many types. This means eligibility can differ from one mortgage to another. This depends on the loan type and the lenders.
In general, though, here are the requirements you should take into account.
Credit History and Standing
Buying an investment property using a mortgage requires excellent credit standing. This means having at least a 620 credit score. If you have at least 720, you get better investment property mortgage rates. In case your credit score still does not meet the minimum requirement, here are things you can do.
- Keep your credit utilization at most 30 percent
- Make sure to continue timely payments
- Build better credit habits and work on repairing existing credit problems in the next coming months
In buying an investment property with a loan, you need to prove you can pay it back. This is possible by providing your employment history and proof of income. To be qualified, your income must be full time and steady. You also need to be working in that job for at least 2 years now.
Whether you will use these loans for a rental property or a second home, your income must be secured. It will be more difficult for people who earn from commissions and tips, as well as for part-timers. Lenders might consider if you show at least three to four years of stable income.
Self-employed borrowers also have the chance for these real estate investment loans. You need proof of income too through two years of tax returns.
Cash reserves are a requirement for some lenders in the application for this mortgage. Investment property mortgages can have high rates. This means payment may be difficult for some. Cash reserves help prove you can pay it.
Most lenders require at least six months’ worth of cash reserves. Other factors may come to play, including the number of properties and the unpaid balance.
Debt to Income Ratio (DTI)
Debt-to-Income or DTI ratio is a standard qualification for real estate investment loans. This is the percentage of your debts over your income. The requirement is that the ratio should now be more than 50 percent.
Some lenders would even only accept at least 36 percent or less DTI ratio. It is proof of the borrower’s financial security.
Buying an investment property will require a down payment. Borrowers need to put down around 20 to 25 percent. While there are lenders that accept at least 15 percent, it is still better to pay as much as you can. If you pay a bigger down payment for your investment property mortgage, the lower the rates will be.
Most lenders that accept a 15 percent down payment will require mortgage insurance. In paying 20 percent, you can avoid mortgage of the insurance and have lower rates.
When buying an investment property with a mortgage, these are vital factors. Eligibility differs from one lender to another. These are the basics you can prepare for though. Check out your eligibility before applying for the mortgage.
Simple Tips for Using Investment Property Loans
Buying an investment property through a mortgage will require you to pay interest rates. If you approach the entire process smartly though, these rates will not be a big deal. To help you along the way, here are simple tips that can help you.
Turn to a Financial Expert
From rental property loans to USDA mortgages, there are many options to choose from. With so many investment financing options available, consult the top-drawer Winner’s Mortgage for more information on the best choices in your situation. Start here with the “Get Started” online Client Questionnaire.
Pay a Considerable Down Payment
When buying an investment property, paying a considerable down payment opens more choices for you. Rates for an investment property mortgage tend to be lower with a huge down payment. So before starting, save up for a considerable down payment.
The standard down payment is 20 percent. If you can put out more than that then it is better. Paying 20 percent will take out the need for premium mortgage insurance. And paying more than that can lower your rates.
Make the Most out of the Mortgage
Buying an investment property helps you earn an investment income with the right circumstance and investment type and at the right time. Winner’s Mortgage can help you decide on the right options for you. We’re there when you need.
Making the most of the mortgage also means preparing for it. The smart thing to do before applying for a loan is to be a strong borrower. Build an excellent credit history and standing that can easily pass eligibility reviews. Your application will likely proceed more smoothly if you start with this.
Real estate is a good investment, with a long-term commitment. You may choose to flip a house or buy a rental property as two possible options. Real estate investment loans are a serious consideration. Choose your investments wisely and check out what you can get from them the most with due diligence on all aspects of the property, financing, and all other relevant factors.