Best Investment Property Interest Rates

What Makes A Good Property Investment

Here are some of the fundamentals to making a solid property investment:

• Location: Close to schools and shops, as well as transport hubs, so its attractive to tenants.
• In a well-established area: generally mining towns tend to be speculative boom-or-bust investments. We look for predominantly owner-occupied suburbs, because owner-occupiers are the ones who drive up the values and drive up the sale prices, says Aggett. They also tend to stay there over the long term, which means there is less availability in the area, which drives capital growth.
• Low maintenance. Aggett steers clear of houses with swimming pools, because if a tenant doesnt maintain it properly, it will be expensive to fix when they move out.
• In good condition this allows the investor to start making money from day one, rather than ploughing money into repairs or maintenance. We are looking for brick homes that are typically single level and very well built. If it is structurally sound and low maintenance, it becomes more of a set and forget property that allows the owner to increase the rent as and when they can afford to spend money on simple things like replacing carpet or paint or updating a kitchen or bathroom, says Aggett.
• Quiet area and ideally off a main road. However, if the location is desirable because it is close to a good school, a family who is renting may consider living there regardless.

If youre buying an apartment there are some additional factors to consider:

Should You Flip Or Rent

Should you flip houses or purchase rental properties?

It all depends on your goals, and to what degree you can leverage your skills, expertise and your current financial situation.

In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.

In mid-2017, the highest flipping returns were in Pittsburgh, at 146.6% Baton Rouge, LA, at 120.3% Philadelphia, at 114% Harrisburg, PA, at 103.3% and Cleveland, at 101.8%, according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.

For rental properties, the best markets in early 2017 were Cleveland, with an 11.5% annual return Cincinnati, at 9.8% Columbia, SC, at 8.6% Memphis, TN, at 8.5% and Richmond, VA, at 8.2%. The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky high.

But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.

Can A Broker Get You Great Investment Loan Rates

A professional mortgage broker can help you find the best loan options for your financial situation, personal goals, and investment strategy. They may also have access to special investment mortgage deals that are exclusive to brokers. A broker can also negotiate with a lender on your behalf, so if you can show that youre a good borrower, you may be able to enjoy a cheaper interest rate on your investment mortgage, whether youre investing for the first time or refinancing.

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Make A Bigger Down Payment

The surest way to get a lower interest rate on your investment property is to make a bigger down payment. Much of the added cost goes away if you can put at least 20% down.

It might be worth borrowing against the equity in your current home to increase your down payment. You can also buy a cheaper house or find a foreclosure you can buy at below-market value. You could even consider if this is an exceptional investment borrowing against your 401.

How Does Cap Rate Change Between Class A B And C Properties

Cap rates will typically vary depending on whether youre purchasing a Class A, B, or C property.

There is no one specific definition of what classifies a property as Class A, B, or C. But generally speaking, Class A office buildings are considered to be of the highest quality, in the best location, and/or in the newest condition . Class C properties are typically older, in less desirable locations, and may need extensive renovation. Class B properties are somewhere between Class A and C.

There can be different combinations of these scenarios where, for example, a lower quality property may be located in a highly desirable area, or where a property is in new condition but is in a less desirable condition. In any event, the class of a property will have some bearing on its cap rate. Typically Class A properties have lower cap rates than Class B or Class C properties.

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How Tough Is The Property Investment Loan Market At Present

Under pressure from the regulators, lenders have collectively jacked up their rates on investor loans. The current trends such as tight rental market, falling property prices, increasing supply in some areas have affected the investment loan market.

Lenders have stricter lending criteria. This is a result of the cap on the borrowing that was set by the Australian Prudential Regulation Authority .

Many lenders require investors to have larger deposits, only a handful of lenders would now lend 90% while even fewer lend 95% of the purchase price.

However, this doesnt mean that its tough to get approved for an investment home loan. You can still find competitive investment loan rates if you know where to look.

Applying with the right lender is key to getting a great deal.

What Is An Investment Property Loan

An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value.

Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.

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Gather The Proper Documents

Your lender will ask you for a few documents to begin the refinancing process, including:

• Proof of income: Youll usually have to show the lender your original pay stubs from the last 30 days. Your lender may ask for a bank statement or another form of income validation if youre self-employed.
• Copies of your W-2 or 1099 forms: Lenders require your W-2s or 1099 forms because they use them to verify your employment history and your income. Your lender may also ask to see your full tax return if youre self-employed, and will require this information from everyone you include on the loan.
• Proof of homeowners insurance: This shows the lender that you have enough coverage on the property to protect your investment.
• Copy of your title insurance: Your title insurance helps your lender verify that the property is yours to refinance. It also provides the lender with a legal description of the property and information on taxes.
• Copies of your asset information: Your lender will want to see your assets, including bank statements, investment account information and retirement savings.

Gather the proper documentation before you apply for refinancing to help speed up the process. Keep more than one copy available in case you need to resend any documents.

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Create An Investment Plan

Getting your investment strategy right from day one gives you the best chance at investment success. Its important to know what assets and liabilities you have, like an existing property or any outstanding debt. This will give you a much better understanding of your financial situation, and consequently will allow you to determine what the best investment opportunities are for you.

Additionally, make sure you start by asking yourself why you want to invest in the first place. What do you hope to get out of it? Setting goals based on what you want to achieve will make sure you stay on track as your investments grow and change in the future.

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Capital Growth Or Rental Income

Setting out your goals can determine which investment strategy you take here. If your aim is to achieve long term gains from your investment, then focusing on capital growth, or the increase in your propertys value over time, might be the way to go. However, if youre looking for your investment to take the form of regular income, you may want to think about renting out your property. Regular contributions from your tenants may mean you wont have to borrow as much resulting in lower repayments.

Is Owning A Rental Property Worth It

This depends on your financial situation, your appetite for risk and how long you are willing to wait for a return. Some investors will always prefer stocks because they are more liquidyou can sell them if need be in a matter of minutesand there is a stress that some people feel when they take on an investment property: the need, for example, to have it occupied by renters, to ensure it is beng looked after and to maintain it. Other investors prefer property because it is a tangible asset, something that they can drive past and see. Scott Aggett, a property negotiator and the founder of Hello Haus is a fan of property owing to its ability to drive-long-term growth: If youve got a small amount of money enough for a deposit you can leverage access to capital against that and allow a tenant to pay that off. In terms of capital growth, the passage of time does the heavy lifting for you.

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Buying An Investment Property

Investing in property can be challenging and exciting all at once. But with the right help and information, you’ll find yourself on the right track.

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Factors That Affect Investment Property Interest Rates

When youre applying for an investment or rental property mortgage, it pays to understand which factors can affect your loan interest rates. Each lender may weigh these factors differently, so shop around to find the best mortgage for your needs.

• Borrowers with higher credit scores tend to qualify for lower mortgage rates. Some loan programs require minimum credit scores.
• Cash reserves: Cash reserves are the money you have access to if you need to pay for repairs, make mortgage payments or cover other expenses. Lenders prefer that you have at least six months worth of mortgage payments saved for a property. The higher your reserves are, the lower the risk of your loan is.
• Loan-to-value ratio: The lower your LTV ratio, the less risk there is for the lender. You may qualify for a better interest rate by having a larger down payment on a new property or borrowing a smaller amount against your equity if youre refinancing a property you already own.
• Debt-to-income ratio: A lower DTI ratio means you have more disposable income to cover your monthly obligations. This means you present less risk to the lender. Paying off debt to lower your DTI ratio can help you secure a better interest rate.
• Property types: Different property types carry different risk levels. Borrowing from a lender specializing in your property could get you a better interest rate.

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How To Finance A Rental Property

Choosing a Loan Type

So, you are looking to buy an investment property and you want to compare investment property mortgage rates. What are your options? You basically have three different types of rental loans, including:

Agency or qualified mortgage Bank portfolio mortgage Non-bank, non-qualifying mortgage

Agency Loans

An Agency Loan is eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, often referred to as GSEs or government-sponsored enterprises. When you think of this type of mortgage, you should think about the process you underwent in obtaining the mortgage on your primary residence. You will qualify based on your ability to repay the loan from all of your sources of income along with the strength of your credit. As part of the underwriting process, youll need to provide pay stubs, tax returns , bank statements, retirement states, and brokerage statements.

Bank Loans

A Bank Loan is not eligible for sale to or guarantee by a GSE, so the bank has to hold the loan on their balance sheet in their own loan portfolio. Most local banks focus on financing commercial real estate and small businesses. Some allocate a portion of their assets for residential mortgage lending, including on rental properties. Often these loans are reserved for existing customers.

Non-QM Loans

If youre interested in beginning the rental property loan process, contact us today to get started.

Comparing Investment or Rental Property Mortgage Rates

Bank Loan:

Maintenance Utilities And Repairs

Just like your first house, theres no getting away from these things on your second one. When researching the location of your second home and associated expenses, remember to take into consideration things like landscaping and potential weatherproofing. For example, if youre purchasing somewhere that has a lush garden, that garden will need to be maintained even when youre not there. The same holds for things like swimming pools, where they may need to be closed during the winter and reopened in the spring. Perhaps your second home is in an area that could be threatened by weather systems, such as tropical storms or hurricanes. Youll need to make sure youre adequately prepared and have people in place who can access the home and take appropriate measures if necessary.

Theres also the cost of utilities and repairs as they come up. If you choose a property manager, they can take care of most of these things in your absence. They would also be the contact for renting out the property if you wanted to do so when not staying there yourself. When the microwave goes out though, or the plumbing backs up, youll want to ensure that youre in a comfortable enough position financially to be able to tackle these things without frustration.

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How To Qualify For An Investment Loan

Much like with an owner-occupier loan, the process to obtaining an investment loan follows a similar process. However, lenders tend to be pickier considering the increased risk therefore, the eligibility criteria for qualification does look slightly different. Here are a list of things a lender might look for in an investment loan applicant:

• Borrowing powerwhat expenses do you have? How does your debt-to-income ratio look?
• Investment historyhave you handled previous investments well?
• do you have any defaults or unpaid debts?
• Assets and liabilitieswhat assets do you currently own? Are you already in some type of debt, such as HECs?
• Purpose of the investment propertywill you have tenants? Or are you flipping?
• Running costswill the property have maintenance fees, management fees, or council rates?

Almost all the points on this list are evaluated regardless of your loan type. However, debt-to-income ratio, running costs, and the purpose of your investment property are most relevant to an investment loan. Understanding and meeting the criteria behind these investment-specific points may strengthen your investment loan application.

Am I Being Overcharged

Without even realising it, you may be paying a more in interest than you need to. Banks have different ways of increasing someones interest rates.

Some of their methods include moving the standard variable rate, providing a minimal rate discount and cancelling your discounts without notice if you arent able to meet lending criteria later on.

Even if you took out an investment loan just over two years ago, you may no longer be on a competitive rate.

By regularly reviewing your interest rates, you can identify whether or not youre paying more than you need to. If you are, you can request a discount or refinance to another lender.

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Common Investment Property Myths

Before examining the benefits of buying investment property, lets bust two persistent myths.

Investment Property Myth #1: Buying a primary residence is the same as purchasing an investment property.

Reality: Although many people think of their homes as investments, a home is not an investment property unless you buy it for the express purpose of generating rental income or a profit upon resale.

Investment Property Myth #2: Home values have always risen, so a primary residence will end up being an investment property if you own it long enough.

Reality: Adjusted for inflation and local market conditions, home values have not always risen. Nationally and locally, housing prices are subject to boom-and-bust cycles. Regardless of how long you own a property, theres no guarantee youll make a profit when you resell it.

How Are Interest Rates Changing

Mortgage rates dropped to historic lows during the pandemic. These rates remained at a low point throughout 2020 and 2021, which led to a very competitive real estate market and sent demand for new properties soaring given historically low borrowing costs.

However, things have started to change as we move through 2022. Mortgage interest rates have moved upward at a sharp pace. The average rate for a 30-year fixed mortgage hit3.5% in the last week of January, making these the highest mortgage rates we have seen since the pandemic started.

The Federal Reserve expects to raise short-term interest rates throughout 2022. These rate increases are consistent with ongoing economic growth, which is also triggered by inventory shortages due to supply bottlenecks. They are also intended to combat the current spike in inflation, which remains one of the Feds key mandates. Higher interest rates will dissuade consumers from taking out loans, which will slow the economy down and eventually curb inflation. Both investors and would-be homeowners will need to prepare for these ongoing changes until the economy levels out by budgeting for higher interest rates when making investment decisions for properties.

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