Should I Get A Mortgage Through A Bank Or Mortgage Broker
There are a number of differences between a bank and a mortgage broker. Banks are only able to offer you rates for their own mortgage products. Youll need to negotiate these rates yourself, and theres a higher chance that youll pay more than necessary for your loan. The main benefit with big banks is that they are a reputable source for financing and offer a high level of customer service.
Brokers are different from banks because they arent direct lenders. Instead, they help you compare the rental property mortgage rates on offer from multiple lenders at one time. This means you get access to many financing options, and you can choose the rates that make the most sense for your financial situation. Most brokers will also negotiate on your behalf to help you get the lowest rate on the market.
Regardless of the route you choose, you will want to ensure that your lender can fund an investment property, especially if you are not planning to spend much time there throughout the year. Many residential lenders cannot finance investment properties unless the owner is planning to spend a minimum of two weeks per year living there.
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Features And Benefits Of An Investment Property Mortgage
The RBC Investment Property Mortgage can provide financing for up to 80% of the appraised value of your rental property.
A Mortgage Solution to Meet Your Needs
Offering competitive rates and a range of terms, the RBC Investment Property Mortgage may be the ideal solution if you’re considering:
- Acquiring a rental portfolio of one or more properties to build income and equity
- Converting your current home to a rental property
- Purchasing a property for your child to live in
How to Qualify for an Investment Property Mortgage
To qualify for an RBC Investment Property Mortgage, you must have a good credit history, demonstrate sufficient rental income , and have enough non-rental income to meet the obligations of the mortgage.
Not sure where to start? Talk to an RBC mortgage specialist, who can help you decide whether an investment property is right for you.
Creating Wealth Through Property
Done properly, property investment is an excellent method of creating wealth as part of a long-term investment strategy. Historically, house prices provide a steady return to investors in the form of capital growth as property prices rise, while rent provides passive income. With the right investment strategy in place, smart property investment can be an ideal wealth creation vehicle.
Better Mortgage: Quick Conventional Mortgages
Better Mortgage, otherwise known as Better.com, launched in 2014 with headquarters in New York Cityâs financial district. SoftBank backs the company, and the lender has funded $14 billion in loan volume in the Q1 of 2021. Better Mortgage provides conventional financing and refinancing in 47 states and Washington D.C. The only states where Better Mortgage is not available are Hawaii, Nevada, and New Hampshire.
Investors can qualify for a conventional mortgage or refinance with Better and receive a pre-approval in a few minutes. The application takes into account credit, income, existing debt, and other factors.
To apply, investors must submit some basic identifying information and consent to a soft credit check. This is an advantage over some other lenders, since it protects the credit report from hard checks, which could reduce the score. The initial application takes three minutes, after that Better requests additional documents to complete the underwriting process. Better pairs investors with a licensed mortgage broker that works on the loan with the customer. While Betterâs mortgage brokers are well-equipped, they are not only focused on a single customer, nor are they experts in real estate investment lending.
Better is offering a $2,000 discount to Awning customers, to be deducted from closing costs.Reviews by Better borrowers are very positive and the internal experience with Awning advisors and investors that have used the service reinforced this.
Risks Of Using Home Equity On A Rental Property
As with any financial product, there are some risks to consider when using a home equity loan or HELOC on an investment property.
- Primary residence acts as collateral. If you can no longer make payments on the home equity loan or HELOC, the lender will foreclose on the collateral property in order to fulfill your debt obligation. In this case, that is your primary residence.
- Closing costs & fees. You will have to pay closing costs and fees on your home equity loan or HELOC. While these arent typically as high as closing costs on mortgages, other loan optionssuch as personal loansoften dont have any fees.
Types Of Loans For Investment Properties In Real Estate
Becoming a real estate investor is a great way to earn passive income. But you will need some money on hand to get started in real estate investing. If you dont have enough cash saved up, taking out loans for investment properties is a great option.
There are actually many types of loans for investment properties. If you choose the wrong type of loan, you can really hinder the success of your real estate investment. So its crucial that a real estate investor understands all of the options available before contacting a mortgage lender.
In this article, we break down the 6 most common types of loans for investment properties to help you, the real estate investor, determine which option works best for your investment.
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Federal Housing Authority Loans
If you are seeking an investment property for the first time and don’t qualify for a traditional mortgage loan, you could consider an FHA loan. Unlike a conventional mortgage loan, these are backed by the government.
Those looking for a loan that is more lenient with its requirements will be glad to know that down payment and credit score requirements aren’t as strict for an FHA loan.
Yet, this rental property investment method comes with some rules. You can only qualify for this type of loan to purchase a 2-4 unit multifamily property. You’ll also have to occupy one of the units for at least 12 months.
For many, this is a small price to pay for receiving the many benefits of an FHA loan.
Is This Loan For Me
This loan is for anyone who wants to borrow to invest.
Most investors tend to be professionals with high taxable incomes.
Borrowing 95% for an investment property is only suitable for people in a strong financial position who have either learnt about property investment or who have experience building a property portfolio.
Is not for someone with a poor credit history, as investment loans are so expensive that you will not make a decent return on your investment.
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Benefits Vs Risks Of Investment Property Mortgages
There are a number of benefits and risks involved with taking out an investment property mortgage.
- Regular monthly income. If you rent your property out, youll get a regular monthly income or at the very least you can use rental money to pay down your investment property mortgage.
- Potential tax deductions. If your expenses are higher than your rental income, you can deduct your losses to reduce the amount of money you have to pay at tax time.
- Tax benefits. You can also claim costs for managing your investment property on your taxes to get bigger tax breaks.
- Capital gain. Your investment property will likely gain equity over time and you can sell it to get a lump sum of cash if the market has appreciated.
- Flexible asset. You can modify your property to fit your needs. For example, it can be a long-term rental property, a short-term vacation rental or a fixer upper that you sell to get a high short-term return.
How Much Will Property Taxes Be
Property taxes are taxes that homeowners pay to support their community and local government. Property taxes fund fire departments, public schools, libraries and other local projects. The amount you pay in property taxes is directly related to the value of your home. If your home is worth more money, you pay more, and vice versa.
Local governments set their own property tax rates, so the specific amount you pay in property taxes depends on your houses location. Speak with a local real estate agent or mortgage lender to calculate how much a certain house will require in property taxes. No estimate is going to be perfect because every homeowner qualifies for different levels of exemption as well.
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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.
What Is Considered An Investment Property
An investment property could be a rental property, a house flip, or a piece of vacant land. Banks are very specific regarding what they consider investment properties, and they base their loans on these classifications. Most banks lend on owner-occupied houses and investor-owned houses. Almost every bank has different loan options depending on what type of property you own.
Each bank can have a different definition, but for the most part, an owner-occupied home is a house that someone lives in for more than 6 months of the year. It is not a house that someone buys and stays in for a week on vacation. It is not a house that someone buys, leaving one room vacant in case they decide to crash there one night. One or more people on the Deed must live in the home more than half the time for at least one year . All other houses are considered investment properties, and the banks have much different loan programs for them than for owner occupants.
If you buy a house as an owner occupant with the intention of using it as an investment, it could be considered loan fraud. If you pretend to be an owner-occupant on a HUD home, it could even be a felony with potential prison time!
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How To Measure Rental Property Performance
When you use a conservative LTV of 75% or less with a rental property loan, the gross cash flow should cover all of the above expenses and more. At the end of each month, youll still have cash profit left over to put into your bank account.
Before you apply for a rental property loan, consider these three income property ratios to help ensure your intended purchase has solid, positive cash flow:
The capitalization rate cap rate for short compares the propertys net operating income to the property purchase price:
- Cap rate = NOI / Purchase price
- $6,000 NOI / $100,000 Purchase price = .06 or 6% Cap rate
Although the NOI doesnt include the mortgage payment, cap rate is a good way to screen out properties that may not cash flow. Thats because the lower the cap rate is without the loan payment, the greater the odds cash flow will be negative.
Rent ratio also known as the 1% Rule – compares the gross monthly rent to the total cost of the property :
- Rent ratio = Monthly rent / Property cost
- $1,200 Monthly rent / $100,000 Property cost = .012 or 1.2%
A rental property with a very low rent ratio is a red flag that the investment will have negative cash flow. As a rule of thumb, the higher the rent ratio the better. Real estate investors who use the rent ratio usually look for a minimum ratio of between 1% and 2%.
Why Are Interest Only Loans Popular Amongst Investors
Interest-only loans can be a good short-term solution for property investors and owner-occupiers alike, but they’re generally more suitable for investors. This is because investors can claim the interest portion of their loan as an investment expense on their tax returns.
According to the ATO:
If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest. However, the property must be rented out or genuinely available for rent in the income year you claim a deduction.
That means investors can claim their entire repayments if they use an interest-only loan, making them a very affordable short-term option for building a portfolio.
However its important to remember that you will have to make principal repayments at some point down the track, regardless of the type of property. Interest-only loans tend to have more benefits for property investors, while owner-occupiers are generally better suited towards a standard principal and interest loan. Do your research and read the terms and conditions before making a purchase decision.
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Things To Watch Out For When Financing A Rental Property
People often assume they can rent their second home when theyre not using it. This is false, and can land you in trouble. Its critical to understand why you cant ever rent out a property you financed with a second-home mortgage.
The reason this isnt allowed is because of how the IRS treats taxes for second homes. If you own a second home, the mortgage interest and property taxes on that second home are fully deductible just like mortgage interest and property taxes for a primary residence.
Knowing this, it makes more sense that lenders dont allow you to rent out a property with a second-home mortgage on it, because youd be double dipping by getting rental income and also getting the same tax benefit as you do with a primary residence.
If you want to have a second home that you can also rent out, then you need to finance it with a rental property mortgage to comply with lender and IRS rules. This means youll need a larger down payment, and will pay a slightly higher rate, but you will benefit from the income and you can also use the income to qualify for the loan.
Are You Ready To Be An Investor
Property investment can be both risky and rewarding. Rental income and capital gains are never guaranteed. Before taking the plunge, here are some of the potential risks and benefits you should think about.
- Rental income. You may earn a rental income that puts cash in your pocket right away some investors may enjoy returns of $50, $100 or more every week, over and above the costs of owning the property. You can invest this money into the mortgage to pay the loan off sooner, or use these funds to supplement your own income.
- Capital gain. Many investors buy property with an eye on the long-term gains, so they’re aiming for future price appreciation. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen. You could potentially grow wealth far more effectively with property than through savings alone.
- Tax and depreciation benefits. You can deduct investment loan interest charges and other investment costs from your income tax each month, making the cost of owning a property far more affordable.
- The potential to add value. Unlike shares or other investments, you may be able to manufacture equity or price appreciation in your property asset by adding value through renovations.
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Home Equity Lines Of Credit
HELOCs are revolving credit lines that usually come with variable rates. Your monthly payment depends on the current rate and loan balance.
HELOCS are similar to credit cards. You can withdraw any amount, any time, up to your limit. Youre allowed to pay the loan down or off at will.
HELOCs have two phases. During the draw period, you use the line of credit all you want, and your minimum payment may cover just the interest due. But eventually , the HELOC draw period ends, and your loan enters the repayment phase. At this point, you can no longer draw funds and the loan becomes fully amortized for its remaining years.
Compared with conventional mortgages, HELOCs offer more flexibility and lower monthly payments during the draw period. You can borrow as much or as little as you need when you need it.
The potential drawbacks are the variable interest rates and the possibility that the monthly payments could skyrocket once the repayment phase begins.
In some house flipping situations, a HELOC could be a lower-cost alternative to a hard money loan.
But unlike a hard money loan, a HELOC could have more risk attached: if you dont already own an investment property, youll secure the HELOC with your primary residence. If you default on the loan, the lender will foreclose on yourhome, not the investment property.
If you already own an investment property, you can overcome this problem by applying for a HELOC on one or more of those properties. The only trick is finding a lender.