Investing in real estate properties can be the smartest way to ensure a steady passive source of income. Although you may need a lump sum to get it started the investment can be an effective dodge against market volatility. In some cases, investors find it tough to come with a huge bankroll and prefer to take loans or mortgages for investment properties.
Investment property loans are available in several forms, and each format of loan comes with different guidelines, terms, conditions, etc. If you want to make your property investment successful, you have to choose the right type of loan for this. In this post, we will talk about some popular forms of loans for investment properties.
What is Investment Property Loans?
Before we talk about the various forms of investment property loans, we should have a briefing on its definition. To secure a steady source of income, some investors, including individuals and organizations, prefer to invest in properties. These investors often finance their investments with mortgages or loans.
Loans for investment properties are often used to finance rehabilitation projects, where investors either resale or rent out their investment properties. Most of the loans designed to finance such projects are short-termed.
These types of loans are popularly known as bridge or hard-money loans. Whether it is residential or commercial property, investors cannot use such units as their primary residence.
How Do These Types of Loans Work?
If you own an investment property, the property will be considered security for your investment property loan. The lender (banks or mortgage brokers) will help you to purchase the property by financing the unit. The amount of the loan will depend on loan-to-value guidelines as set by the lender.
Bridge or hard-money lenders can lend up to 80% of the property’s estimated current market value. Have a look at some of the best types of loans for investment properties.
Hard Money Loans
Hard money is one of the most popular forms of investment property loans. A lender can get hard money loans from professional mortgage brokers or traditional banks that offer loans property investment purposes.
One of the best things about hard money loans is that you can seal the deal quickly. The process of obtaining the loan is faster than other forms of investment property loans like mortgages. Another best part is that lenders who offer hard money loans do not give too much priority to the applicant’s credit score. These types of lenders instead focus on the value of your income property to decide if you are qualified for the loan.
Although hard money loans are one of the most popular forms of investment property loans in the landscape, some investors do not prefer it due to some guidelines and rules. Meaning, the applicants will have to maintain a set of formalities and documentation.
Another discouraging fact about hard money loans is that you can get a maximum of 36 months as the loan term, while the interest rates can be a little bit higher than other forms of loans like mortgages for investment properties.
Traditional Mortgage Loans for Investment Properties
In the landscape of real estate investment, traditional mortgage loans are one of the most common options for investors. If you are an owner of a primary residence, you must be aware of the conventional mortgages.
Financial institutions like banks or mortgage brokers offer Mortgage loans for investment properties. Mortgage loans are one of the simplest forms of property investment loans, and fewer formalities are required to maintain for this. However, there are some standards investors need to follow when obtaining the loan from a recognized lender.
In this process, the applicants require to pay at least 20% of the loan amount as a down payment. Lenders ask investors to pay the money as security deposit considering it will secure their financial standing. Besides, here, your credit score and loan history is going to play an important role.
Lenders will look at your credit score (620-740) and credit history before they qualify you to obtain traditional mortgage loans for investment properties.
Private Money Loans
These types of loans are a little bit different than hard money and traditional mortgages provided by banks of mortgage brokers. In the case of private money loans, the lenders are not banks or any recognized financial institutions. Here, the lenders are some individuals who are looking for the right pot to invest money and get a good return on investment.
Private money loans can be an excellent option for those investors who were turned down by traditional financial institutions. These types of private lenders come with nominal formalities, and they may not give too much priority to your credit score and loan history.
In private money loans, there is no hassle of facing strict terms and conditions. Loan terms are flexible and negotiable, and you may obtain the loan with lower interest rates. You can contact some trustable mortgage brokers to get in touch with such lenders.
Fix and Flip Loans
These types of loans for investment properties are for investors looking for short-term loans. These types of loans are mostly sought by investors who want money to renovate their investment properties and start earning from them as quickly as possible.
The guidelines, terms and conditions of fix and flip loans are quite similar to the hard money loans. Like the hard money loans, these types of loans are available for the investment properties. Although you can approach traditional financial firms like banks and certified mortgage brokers, real estate crowdfunding agencies can also be an option for you.
Just like hard money loans, it is relatively easy to get qualified for the fix and flip loans. Unlike traditional mortgages, where your lenders’ focus will be on your credit score and loan history, here the lenders will give priority to your property’s value and profitability.
Home Equity Loans
This type of loans for investment properties allows the property (home) owners to apply for loans against their existing home and use the money to purchase a second property.
In this case, lenders evaluate the equity of the homeowner and the current market value of the existing property to qualify the applicant for the loan. In most cases, the lenders offer loans of up to 80% of the equity value of the borrower’s current property.
Like any other form of loans or mortgages, home equity loans have up and downsides. To determine if you are eligible for the loan, your lenders or mortgage brokers will check your credit score and evaluate the current market value of your existing home.
Home equity loans can be an easy way to obtain property investment loans. One of the best things about this loan is that interests you will pay for this loan are tax-deductible.
The home equity loan is like a second mortgage, and you have to pay a higher interest than the first investment property mortgage. If the borrower fails to repay the loan within the assured period, the lender will repossess the property and sell it to collect the unpaid dues. If you are a responsible property owner, home equity loans can be the right choice for you.
Arranging money to invest in real estate property will not be a challenging task if you know how to choose the right sources. We have thoroughly discussed the features, pros and cons of different types of loans for investment properties. You can go with any options based on your financial standing, preferences and goals. Remember, the wrong choice can be a significant obstacle to achieving success in the industry. Hence, read all loan-related documents carefully and learn about the terms and conditions before signing the deal. If you are new in the landscape, you can consult financial experts or mortgage brokers to make the process hassle-free.