Best Type Of Loan For Investment Property

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Principal And Interest Loan

What Types of Investment Property Loans are Available in Phoenix, AZ?

The term principal and interest refers to two components of your home loan repayments:

  • The principal, which is the initial amount youve borrowed for the loan

  • The interest, which is the cost charged by the bank to borrow the money

So if you borrowed $400,000 for a home loan at a 3.00% p.a. interest rate, that $400,000 is the principal which you have to pay back, while the interest is what you pay back on top of that principal .

With each principal & interest repayment, an increasing portion of the payment will go towards paying off the principal and a decreasing portion will go towards paying interest, since youre chipping away at the balance owing right from the beginning.

The key difference between principal and interest repayments and interest-only repayments is principal and interest loans pay off the actual loan principal right from the beginning. So the actual house youve borrowed all that money for is being slowly paid off, whereas interest-only loans only pay the extra interest costs.

What Can A Construction Loan Be Used For

A construction loan can be used for a number of projects, depending on your lenders requirements and terms of agreement. Here are a few of the ways to utilize an investment property construction loan:

  • Purchasing raw land

  • Building an addition to a property

  • Framing and finishing a house

  • Building sheds or other structures

  • Adding a garage

Is It Harder To Get A Mortgage For An Investment Property Than A Home

Your home buying experience may be limited to the homes youve taken a mortgage on to live in, and youre wondering if youd even qualify for an investment property loan.

Just like with personal mortgages, youll need good credit to qualify for the best rates. But even if you dont have great credit, there will be financing options for you.

If youre new to investment properties, be sure to consider what your monthly repayment cost will be and make sure you can afford it. If youre trying to flip a home, youre not guaranteed to sell it before that payment comes due, so if you cant cover it, you risk foreclosing on the property.

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What Is Line Of Credit

A line of credit loan means a certain credit amount is approved based on your usable equity.

You only pay interest on what you spend. You can apply for an equity release, but if youre not ready to use the funds right now, ensure you have an offset sub-account so you wont pay interest on the loan increase until you use the funds.

If you take out a lump sum, you’ll pay interest on the entire amount. With a line of credit, you only pay interest on the amount used, but you could be tempted to access this money for unnecessary luxuries.

Remortgaging A Rental Property

Types of Commercial Real Estate Loans

As with any property, there are times when it makes sense to consider refinancing a rental. Refinancing often gives the owner a chance to lower their interest rates, reduce their monthly payments, and even access some much needed cash.

Some of the key benefits of refinancing a rental property include:

  • Switching from an adjustable to rate to a fixed rate Refinancing often allows property owners change the terms of their loan, switching from an adjustable to a fixed interest rate. This makes monthly payments more predictable and easier to manage.
  • Lowering the mortgages interest rates If interest rates have dropped since the original purchase of the property it often makes sense to refinance. A lower interest rate can save the buyer money over the long-term life of the loan.
  • Lower monthly payments Lower interest rates and the switch from adjustable to fixed rates can lead to lower monthly payments for the owner, helping to improve their cash flow.
  • Renegotiating the terms of the loan Refinancing gives buyers the opportunity to renegotiate the terms of their mortgage, often upgrading to a mortgage that is more favorable to the buyer.
  • Access the propertys equity Rental property owners often choose to refinance as a way of access cash which can be used for property improvements or put toward fresh investments.

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Types Of Investment Property Loans For 2021

Are you looking to buy an investment property in 2021? Investing in real estate can be a great way to make a ton of money and build wealth. However, acquiring investment properties requires financing. Very few first-time real estate investors have thousands of dollars just sitting around to purchase an investment property. Most people will need to borrow money to get a foothold in the real estate market. Therefore, understanding the different types of investment property loans that might be available to you is crucial.

In this article, we are going to discuss the best types of investment property loans for 2021.

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What Is A Conventional Bank Loan

Maybe a private money loan is not an option for you. Most investors use conventional bank loans, which are simply normal home loans. However, these loans are harder to qualify for when you plan to use them for investment property than when you are just buying a home.

Loans for investments are usually more risky for lenders. Often lenders want you to prove you are financially strong enough to pay the mortgage for both your own home and an investment property. Conventional lenders often try to lower this risk by requiring a larger down payment or raising the interest rate.

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What Type Of Loan Is Best For Investment Property

You can get investment loan support from banks and various organizations both in your professional business life and in your personal life. There are several ways to assess loans taken out in the long or short term to finance your investments. You can choose the investment that suits you best according to your financial capacity, type, and value of your investment, or by sector. So, what are the best types of loans for real estate investment?

How Can I Get A Loan For A Rental Property

BEST Loan Option For Real Estate Investors

To get a loan for a rental property, youll want to find a lender that finances investment properties. Youll need to look for a lender that offers loans for the type of property youre interested in, whether thats a single-family house, a duplex, or even multifamily apartments.

Once youve found a lender, getting a rental property loan works pretty much the same as any mortgage loan. Expect to have an appraisal, to make a down payment, and then to make monthly payments on your mortgage loan.

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Options For A Rental Property Loan

Its much easier and less expensive to find a loan option for a residential rental property like a house or a duplex compared to a large apartment building or commercial property. If youre shopping around for a rental property loan online, you can get a free rate quote from an experienced mortgage professional on Stessa.

Here are some of the options to look at when you need a loan for buying a rental property or refinancing an existing mortgage:

Best For Rehab Loans: Lending One

Lending One focuses on serving real estate investors by combining technological advances with real estate financing. The company was founded in 2014 and offers a wide range of funding solutions for interested investors.

The company is unique because it offers all kinds of real estate loans from fix-and-flips to rentals. Fix-and-flips are properties that are purchased, renovated and then sold for a profit. Lending One understands the business activities executed within the real estate market and effectively diversifies its loan offerings to better fit funding needs. For example, Lending One offers different loan amounts depending on the type of property and potential renovations.

Lending One terms range around 30 years for investment property financing. The company offers a wide range of loans with different terms and rates. For example, Lending One provides a minimum loan amount of $75,000 and a maximum amount of around $10 million for fix-and-flip loans. Its recommended to have a minimum credit score of at least 680. No specific rates were provided.

Overall, the company is relatively new to the competition but offers extensive real estate expertise.

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Having A Real Estate License

Becoming a licensed realtor may give you an edge as a real estate investor. This approach wont directly save you money on down payments. But it might offer you the chance to score better property deals and save on the cost of agent commissions.

Having a real estate license also gives you access to the MLS. You can use this tool to search for properties and check comps of recently sold homes in the same area. Being a licensed real estate agent also gives you more control over the deal and other perks.

But, getting your license requires an investmentboth of your money and your time. Generally, it takes around 100 hours of studying, coursework, and exams to qualify for your license. Once you get your license, youll need to work under a broker plus complete continuing education classes every year.

Best For Comparing Lenders: Lendio

You can aquire a Home Enhancement Loan from banks and banking ...

Lendio helps small businesses obtain funding through an online loan marketplace. The company has helped to fund over 300,000 loans by working with partners such as Bank of America and Chase.

One thing that makes Lendio unique is that the company offers information on a wide range of commercial mortgages, which are also known as business mortgages or loans. The company offers loans specifically designed to help purchase or refinance a commercial property. Lendio potentially helps provide funds in less than 45 days, which can prove beneficial if you are constrained to a tight timeline.

The loans range between 20 and 25 years. Lendio offers lower interest rates between 4.25% to 6% under the proper conditions. Loan amounts are between $250,000 and $5 million. Loan terms and loan amounts are closely tied to the strength of your credit score, so its advised to enter into a commercial property loan with a strong to excellent credit score.

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Are There Sba Loans For Investment Property

If youre familiar with the low-interest small business loans offered by the Small Business Administration, you might wonder if you can use them for investment property. In fact, you can. The SBAs 504 loan program can be used to buy property or land, as well as cover improvements and renovations for commercial real estate.

Hard Money Loans For Investment Properties

You can obtain hard money loans from professional individuals or companies that lend money specifically for real estate investing purposes. The best thing about these types of loans for investment properties is that they are faster to secure than conventional mortgage loans. Moreover, hard money lenders donât look at the real estate investorâs credit score â instead, they evaluate the value of the income property youâre planning on buying to decide whether or not to grant you the loan.

Looking to buy an incomeproperty? Click here to analyze and find the best investment properties in your city and neighborhood of choice!

Although this is one of the common types of loans for investment properties in real estate, it does come with a list of formalities, documentation, and guarantees. Another thing to keep in mind before approaching hard money lenders is that these are short-term and they come with higher interest rates .

As a result, these loans for investment properties are not suitable for any type of income property. Hard money loans are a good financing option for property investors who aim to buy cheap investment properties, renovate them, and quickly sell them for a profit and pay off the loan in due time . On the other hand, you wont possibly be able to pay off a hard money loan on a long-term residential investment property in only 3 years.

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Home Equity Line Of Credit

This is very similar to a credit card. The lender allows you to withdraw money up to a set limit. The credit line is always available, and your monthly payments depend on your loan balance and interest.

The HELOC allows you to withdraw money as often as you want over a certain period, but in most cases, you have to start paying back after 7-10 years. The long term costs of this type of loan are lower.

However, the one major downside is that if you default on the payment, your home is at risk of foreclosure.

What Is The Difference Between A Fixed

Buying Opportunities & Low Interest Rate Rental Property Loans

Not all mortgage rates are created equal. There are different types, and each has their own benefits, including:

A fixed interest rate is one that remains the same throughout the entire time you are paying off the loan. The rate is predetermined, so if you like consistency and want to know exactly what youll be paying, this is the better option for you.

Variable rates fluctuate during the course of the loan based on the current index value. The rate can fluctuate, and go up or down depending on the market. People who want to try to save some money on their loan can opt for a variable rate. If the rate goes down, you’ll make a lower monthly payment for that period.

These rates are charged on an upward curve, meaning you pay less each month at the beginning of the loan and gradually increase your monthly payments as the loan progresses. The actual interest rate doesnt change, but the total amount you pay will decrease because you will be paying off more of the loan as time goes on.

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How To Keep Rental Property Loan Fees Low

Although rental property loans can be more expensive than getting a loan on your primary residence, there are several things you can do to keep rates and fees low:

  • Maintain a good credit score, ideally of at least 740 or higher
  • Make a bigger down payment of between 20% and 25% for a lower LTV
  • Use a local bank or lender who knows the local real estate market and can take the time to learn about you and your business
  • Having your loan application docs prepared ahead of time shows the lender youre a serious investor and improves your chances of getting your rental property loan approved
  • Document the successful financial performance of your existing rental properties with profit and loss statements and cash flow reports
  • Shop around for the best loan terms and conditions
  • Think outside of the box and consider alternative loan solutions for rental property such as private lending or seller financing
  • Consider forming a small joint venture or partnership for bigger projects that require capital-intensive updating or are outside your field of investment expertise

Best For Rehab Loans: Lendingone

LendingOne

Why We Chose It: LendingOne earns our nod for best rehab lender because they are one of the very few commercial lenders that make it easy to get a pre-approval letter, they finance up to 90% loan-to-cost and provide lower rates and fees than their competition.

  • Pre-approval/proof of funds available online within minutes

  • Founded by investors to improve upon traditional lenders limitations

  • $175 charge for each draw

  • Only available for one- to four-unit properties, no commercial

In 2014, Bill Green and Matthew Neisser founded LendingOne in response to their frustrations felt toward the difficult lending environment from rigid bank criteria and the easier, though more expensive, hard money alternatives.

As a direct private real estate lender, LendingOne has become the best rehab lender in the industry because they help investors get what had been missing in the market, such as pre-approval letters and proof of funds, higher leverage, and lower rates and fees.

LendingOne offers fix-and-flip and rehab-to-rent loan products. Down payments range from 10% to 20%. For rehab to rent, they have a 30-year fixed-rate loan as well as 5/1 and 7/1 ARM loans. Their fix-and-flip loans can finance up to 90% of your repair costs. Two years of interest only payments are an option on the fix-and-flip loans too. LendingOne loans on two- to four-unit properties only, including condos and townhouses.

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Rental Property Pros & Cons

Rental property pros

Whether you buy an apartment complex or duplex, the biggest advantage of rental property is the predictable income stream that it generates.

Whereas a three-month house flip venture might produce a $50,000 gross profit on a $200,000 investment, a $200,000 rental property could generate, say, $1,000 a month after expenses. At that rate, youll exceed the quick profit amount in 50 months, and the revenues wont stop there. Theyll keep pouring in month after month, year after year.

In addition to creating profit, rental income will help you pay down the loan you obtained to finance the property. And in some cases, current and future rental income help you qualify for more favorable loan terms.

The greatest perk of owning rental property may be the tax advantages. In addition to generating income and potential profits from capital appreciation, rental properties provide deductions that can reduce the tax on your profits.

Common deductions include money spent on mortgage interest, repairs and maintenance, insurance, property taxes, travel, lawn care, losses from casualties , as well as HOA fees and condo or co-op maintenance fees.

If net cash flow isnt positive after deducting expenses, your rental income may even be tax-free!

Rental property cons

If youve ever spent time talking with a landlord, you know that owning rental property is not without its headaches and hassles.

But these services arent free.

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