Are you looking to buy an investment property? 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 today.
Related: Real Estate Investment Financing: 7 Ways That Work for Beginners
1. Conventional Financing
Of all the investment property loans, this type of loan is the most common. However, you should expect to place a down payment of at least 20% of the investment property’s purchase price. Not all new real estate investors can easily raise this amount. Moreover, for you to qualify for conventional financing and get affordable interest rates, you need to have a good credit score. However, you should shop around for the best terms and interest rates to maximize your profits.
Related: Tips for Getting a Mortgage for an Investment Property
2. Federal Housing Authority (FHA) Loans
If you are thinking of buying a rental property but don’t qualify for conventional financing, one possible way of financing an investment property is to get a loan backed by the FHA. The US government insures FHA loans, and one can only use them to buy an investment property where he/she will live for a minimum of 12 months. For instance, you can buy a multi-family property such as a fourplex, reside in one of the units, and rent out the rest
While not everyone is eligible for FHA loans, they can be a great way to get into the real estate market. What makes them so attractive to first-time real estate investors is that they require relatively low down payments. Once you have improved your credit score and saved enough money for a down payment, you can acquire your next investment property using conventional financing.
One drawback of these investment property loans is that they can’t be approved if the investment property isn’t in good livable condition. This means that you can lose a good investment opportunity to another investor who isn’t limited by FHA loan requirements.
3. Hard Money Loans
Hard money loans are short-term loans issued by private investors or entities which use your assets as collateral. They are typically easier to qualify for compared to other investment property loans. They have no credit score requirements like traditional mortgages. You can qualify for these investment property loans even if you have credit issues.
Another advantage of these loans is that they have quick approval. It’s possible to get approved within a day. In a buyer’s market, these loans can be a great way to beat the competition. Nevertheless, these short-term loans can be very costly due to their high investment property mortgage rates. They are typically used for flipping properties or as a bridge loan to purchase an investment property urgently before refinancing.
Related: When Are Hard Money Loans for Rental Property a Good Idea?
4. Private Money Loans
Another great way to enter the world of real estate investing with no money down is to use private money loans. These are short-term loans offered by wealthy individuals (relatives, friends, business associates, etc.) who trust you and are willing to help you out.
Unlike other investment property loans, these loans typically have very few formalities and terms are more flexible. Some private money lenders may charge very low interest rates or may not care about them as long as their investment is paid back. The major drawback of these loans is that your relationship could be affected should something go wrong.
5. Home Equity Loans and Home Equity Lines of Credit
One type of investment property loan to consider today is a home equity loan.
You can use the equity you’ve built up in your current home as collateral for a second mortgage. An appraiser from the lending institution will determine the value of your home so as to set the eligible loan amount. You typically can borrow up to 80% of the value of your home equity. You can use the loan as a down payment on a new mortgage.
Instead of a one-time loan, you can use a home equity line of credit (HELOC). Like a credit card, a home equity line of credit allows you to borrow a certain amount of money and access it whenever you need it. These investment property loans offer real estate investors more flexibility.
6. Fix and Flip Loans
If you don’t want to deal with tenants, the fix and flip real estate investment strategy can be a good choice. So long as you do it right, you can generate good returns within a short timeframe after selling your investment property. If this real estate investment strategy sounds good to you, you can use a fix and flip loan to finance your investment.
These are short-term investment property loans that allow you to quickly acquire, renovate, and sell investment properties that need serious repairs and upgrades. They will typically fund house flipping deals that banks won’t touch.
They are essentially hard money loans and, therefore, are secured by the investment property. As hard money loans, they are typically easier to qualify for and fast to fund compared to traditional mortgages. Lenders will mainly focus on the potential profitability of your real estate project.
However, you need to have a proven track record of successful house flipping. These investment property loans can also be expensive due to high-interest rates and closing costs. You also have a very short period of time to pay it back, typically a year or less.
The Bottom Line
While becoming a real estate investor can be a lucrative way to generate income, it is capital intensive. Fortunately, even if you don’t have a huge bankroll, there are several investment property loans that will enable you to seal real estate deals. To find one that fits your investment goals right now, due diligence is mandatory.
Before you decide to use any of these investment property financing options, remember that your financing costs will affect your return on investment (cash on cash return). With Mashvisor’s mortgage calculator, which is integrated into the investment property calculator, you can effectively determine how your investment property loan will affect your return on investment on a rental property. Try it out now.