Acquaint yourself with the various financing strategies and options for investment properties. One of the most popular ways for Americans to put their money to work is traditionally and currently still in real estate. Real estate was chosen as the best long-term investment by a greater percentage of American respondents to an annual poll conducted by Gallup than stocks or gold. However, it is common knowledge that real estate can be quite pricey, and a large number of people do not have the financial resources necessary to purchase investment properties outright. The acquisition of an investment property can be financed in a variety of ways, including the use of conventional loans and the sale of assets that the investor already possesses.
- A piece of real estate that is purchased with the intention of earning a return on the investment, either in the form of a capital gain or a monthly cash flow, is referred to as an investment property.
- Conventional loans, which are typically reserved for one's primary residence, are also available for investment properties; however, the requirements for the down payment and the reserve may be more stringent.
- A short-term fix-and-flip loan can offer larger loan-to-value amounts and more flexible repayment terms to investors who intend to buy a property with the intention of quickly selling it for a profit.
- If you already own property, you may be able to leverage your existing assets by borrowing against your existing equity to finance the purchase of an additional property. This will allow you to take advantage of a potentially lower interest rate.
What Exactly Is a Real Estate Investment?A piece of real estate that is purchased with the intention of generating a return on the original investment or serving as a source of income for the buyer is known as an investment property. Single-family homes and multi-family homes with features like duplexes and apartment buildings are common examples of well-liked real estate investments. Investing in real estate typically results in a profitable return thanks to the regular flow of cash that is generated by the property. Your monthly profit will be the amount of rent that is in excess of what it will cost you to own and maintain the home if you buy a property for investment purposes and then rent it out to a tenant. Having an investment property that appreciates in value while you own it can also result in a capital gain for you. One of the key distinctions that can be made between investment property, a primary residence, and a secondary or vacation home is that a primary residence is the one in which you spend the majority of the year and does not typically serve as a source of ongoing monthly revenue. In the case of a multi-family dwelling, an investor's primary residence and investment property can be located on the same piece of real estate at the same time. IMPORTANT: When it comes to the requirements for borrowing money, investment properties and primary residences are treated very differently. While you may be able to purchase a home with a down payment of as little as a few per cent (or even none at all, in the case of certain specialised loans), purchasing investment property typically calls for a down payment of closer to 15 to 20 per cent as well as larger cash reserves.
Loans from Conventional BanksConventional loans for investment properties can be obtained from lenders in a manner very similar to that of conventional mortgages for primary residences. These loans are subject to a significant number of the requirements that are imposed by Fannie Mae and Freddie Mac on other conventional loans. The requirement for a larger down payment is one of the most significant distinctions that can be made between loans for primary residences and loans for investment properties. In many cases, a down payment of only three per cent is required to purchase a primary residence. Loans for investment properties that are backed by Fannie Mae typically require a down payment of 15 per cent for single-family units and up to 30 per cent for multi-family units, although the exact amount varies depending on the type of loan. Another point of differentiation is the amount of qualifying income required for a conventional loan when purchasing an investment property. In the same way that you would use your personal debt-to-income ratio when purchasing your primary residence, you can use it to determine whether or not you are qualified for a mortgage. To qualify, however, you can also use the anticipated future rental income from investment properties. This is another way to meet the requirements. IMPORTANT: If you want to qualify for a mortgage with rental income, the income must generally be verifiable in some way, such as through the seller's tax returns or a signed lease for the property.
Real estate investors who want to quickly renovate and resell a property can take advantage of a loan product called a fix-and-flip loan. Because an investor who buys a property to rent it out for many years has very different needs than one who flips homes, the type of loan that each of these investors might require is also very different. First, unlike traditional mortgages, which are intended to cover the cost of the home minus the down payment, fix-and-flip loans take into account the expenses that will be incurred by the investors for the cost of making repairs to the property. As a consequence of this, it is possible that they have borrowed more money than the property is currently worth. Fix-and-flip loans, on the other hand, typically come with interest rates that are significantly higher than those of conventional loans. This rate takes into consideration both the fact that the lending institution is providing more money than the actual value of the property warrants and the likelihood that the borrower will repay the loan in a shorter amount of time than originally anticipated. For instance, the term of a loan for a fix-and-flip project might only be between 12 and 18 months. TIP: Some loans for property flipping and renovation come with interest-only repayment periods. During these periods, the investor is exempt from making payments that go toward paying off the loan's principal. It is essential to keep in mind that although these loans include a number of advantages, such as the fact that they are designed specifically for real estate investors, there are also a number of potential drawbacks. In the event that you are unable to sell the property as quickly or for as much as you had hoped, you may find that you are "underwater" on a loan that has a high-interest rate and monthly payments that are unaffordable for you.
Loans for Renovating and Selling