When it comes to buying an investment property, a real estate investment loan is the go-to for many investors. There are many different types of investment loans, also known as mortgages, for real estate investing. But what are the best types of investment property loans for real estate in 2020? Read this blog to learn about the 8 best ones!
1. Conventional Loan for Investment Property
The standard mortgage loan for investment property is a conventional investment loan. The guidelines of a conventional mortgage are set by Fannie Mae or Freddie Mac and the process of obtaining a conventional mortgage varies from state to state. However, many requirements are universal across the country. These include a 20 percent down payment of the property price, a good credit score, and six months’ worth of mortgage payments in cash. As it pertains to a credit score, the typical minimum score for a conventional loan is 620. To obtain good investment home loan rates, real estate investors should aim for a credit score of 740 and above.
2. Hard-Money Investment Property Loans
While a conventional mortgage is spread over many years, hard-money loans do not last as long. Hard-money loans are short-term loans, for up to 36 months. The investment property loan requirements of hard money differ from those of conventional mortgages in other ways as well. There is no credit score requirement with these loans. Instead, hard-money lenders are interested in the value of the investment property in question. Due to these requirements, hard money comes with very high investment property loan rates, typically up to 10% higher than those of their conventional counterparts. As a result, it is recommended that hard-money loans are reserved for affordable investment properties or properties used in a fix-and-flip.
3. Private Money Loans
If a real estate investor cannot get a loan for investment property through a bank or lender, a private money investment loan can be a great alternative. As the name suggests, a private money loan is a loan provided by private individuals, such as friends, family, co-workers, or other real estate investors. These loans are private and thus the terms, such as interest rates and duration, are negotiable. The flexibility of private loans makes them an excellent choice for real estate investors. There is a caveat investors must be aware of, however. If the borrower does not pay off the loan in time, private money lenders can foreclose the property of purchase.
4. Government-Assisted Loan Programs
The federal government can also be a source of financing for real estate investments, particularly for owner-occupied rental properties. The most common example of such loans is the FHA loan for an investment property. FHA loans allow real estate investors to purchase rental properties and rent them out after living in them for over a year. FHA loans are renowned for their very low down payments, which can be as low as 3 percent. A VA loan for investment property follows many of the same requirements and conditions. If an investor is eligible for federally-funded, owner-occupied loans for real estate investing, it would be wise to consider these options.
5. Home Equity Loan on Investment Property
Another top option for loans in the US housing market 2020 is a home equity loan on investment property. Home equity rental property loans allow real estate investors to borrow against the equity of their home to finance the purchase of a second property. Home equity loans fund much of the purchase and allow up to 80% of the home equity’s value to be borrowed. While home equity loans are convenient sources of property financing, they do come with higher interest rates than the first mortgage used to purchase the property whose equity is in question.
6. Purchase-Money Loans
A purchase-money loan, also known as seller financing or owner financing, is another top form of investment loans. What is a purchase-money loan? Essentially, it is a loan for investment property in which a property seller acts as a lender and provides a loan to the property buyer. While the concept is somewhat odd on the surface, both the lender and borrower benefit from a purchase-money loan. The borrower receives an investment loan for a property and the property seller offers high investment property mortgage rates and receives high-interest payments. Purchase-money loans are not a common choice, but they can be a great option for some real estate investors.
7. Lease with Option to Buy
More common than a purchase-money investment loan, a lease with the option to buy is a beneficial form of property financing for potential real estate investors. A tenant (investor) agrees with the landlord (seller) to pay portions of the rent towards the purchase of the investment property. The two parties agree on a deadline to purchase the investment property, and the agreement between the tenant and landlord can be negotiable. The flexibility of this agreement allows the buyer to pay a lower down payment, have a lower credit score, among other requirements.
8. Commercial Investment Property Loans
If you’re interested in buying commercial real estate properties, you’ll have to use a commercial investment loan. While the principle of these loans is the same as those of residential rental properties, the specifics can differ. Down payments of commercial loans, for instance, can range from 15 to 35 percent of the property price. Interest rates of commercial properties, however, tend to be similar.
All in all, the best source of real estate investment financing will depend on your needs. There is a multitude of types of investment mortgages. Differences tend to be in terms of duration, mortgage payments, and interest rates. There isn’t a clear-cut ‘best loan for investment property’. Real estate investors will need to decide for themselves, based on their finances and investing goals, which type of investment loan is optimal for them.
To learn how Mashvisor can help you determine how your mortgage and interest payment affect your real estate return on investment, click here.