Investing in real estate is a trusted way to protect yourself against the unpredictable stock market or other investment options. You may have to spend some money to take care of your property, but there’s also the ability to make passive income from renters.
When you start in real estate investment, you may not have a lot of cash on you. If you’re looking to invest in a property you love, but don’t have enough money to pay for it, you’ll have to start looking around for a loan.
Loans for investment properties are much different than a homeowner’s loan. Check out all the mortgage options that are best for rental properties, so you can decide which ones would be in your best interest.
Related: How to Invest in Real Estate with No Money: A Beginner’s Guide
1. Regular Bank Loans
Homeowners know that the conventional mortgage is run by the Fannie Mae guidelines, which determine who can get loans and for how much. It’s a system meant to include as many people as possible to expand the market, but the same guidelines don’t apply to rental properties.
The first major difference is in the down payment. People looking to buy a home often have to put down a minimum of 20% of the purchase price to secure their mortgage, but rental properties are different.
Lenders may ask for 30% of the purchase price since there’s more risk involved and future rental income isn’t used to weigh the calculations. For a conventional loan, lenders also often look for six months of savings set aside to cover the mortgage on a rental property.
2. Home Equity Loans
Drawing on your home equity to secure a loan has its pros and cons. These are mostly used for long-term rentals, and used by people who already own homes.
It may be possible to use 80% of the home’s value to purchase a second home. This draws people in, along with the fact that monthly payments can be interest only.
The downside to a home equity loan is that the prime rate can change, meaning your interest rate could fluctuate over the length of your mortgage. There aren’t any guarantees that the interest rate won’t spike, so you may pay more money than you took out.
3. Fix and Flip Loans
Real estate investment doesn’t always have to end up with the investor being a landlord. Many people invest by flipping a house since they could get back more than they put into the renovations when the house sells.
Fix and flip loans are short term because the house is expected to go back on the market quickly. You can easily receive these since the loan is secured by the property and not a credit score.
Fix and flip loans aren’t cheap to get, which turns some investors away. Interest rates soar for these loans between different lenders and depending on how long your renovations will take. They can also drive up closing costs, minimizing the investor’s actual profit.
Before you jump into a fix and flip loan, determine the cost of mortgage alternatives by doing research online. It may seem promising to get the investment money now, but you could end up ultimately losing money because you took out the wrong kind of loan.
4. Government-Backed Loans
Those who look to invest in a property with multiple rental units have mortgage options specifically designed for that kind of investment.
Investors looking to become landlords commonly use Government-backed loans. They have very low down payments, so you can keep up with it easily month to month as you make money.
Cons of this route can pose challenges though. They can have strict credit score requirements and you have to pay a monthly mortgage insurance premium no matter how much you borrow. That adds up quickly, making the low down payment not so much of a deal for some investors.
5. Portfolio Loans
Portfolio lenders play a different game. They can create their own lending rules, so every company will differ. They’re often flexible with clients and allow less money down or more money borrowed, which is why many people try to secure this kind of loan.
The costs of this loan remain low because lenders write their own documentation and government rules don’t control them. At the same time, this flexibility and cheap upfront costs often make other issues arise.
Portfolio lenders can charge things like a prepayment penalty, which is a fee you pay if you pay off your loan ahead of schedule. A lack of traditional paperwork required from the borrower also leads to higher costs as there’s a higher risk for the lender to hand out money.
6. Commercial Loans
If you invest in a property with more than four units, you have to look into commercial loans. This kind of loan often goes to residential properties that expect to house many people and present more risk.
A commercial loan isn’t something you can apply for and receive quickly. They’re used to pay for operational costs, which is an immediate matter, but that doesn’t guarantee you’ll receive immediate approval.
When you apply, you have to post collateral. Then the company will check what the prime lending rate is at that current moment to determine your interest rate. After that, you’ll have to pitch exactly what you’re using the money for and how you’ll pay it back.
When that wraps up, the lender will work through your paperwork, which can take some time. If you do this before you need the money, you could find yourself celebrating a big cash flow to jump-start your business when you need it a few weeks or months down the road.
Mortgage Options for Real Estate Investors
There are many kinds of loan options to consider for your real estate investment. Read as much as you can about each type of loan to figure out which one works best for what you want to do. The right loan can make your investing dreams come true, if you know what you’re doing and use your money wisely.
This article has been contributed by Holly Welles from The Estate Update.
