There are more avenues today than ever before for funding real estate investments. You have different funding choices based on:
- Kind of property
- Sum you must borrow, and
- Investment condition.
Investors only starting can have fewer choices. But, with your portfolio increasing, more opportunities are opening up. This may make it easier to meet the needs of particular investment in fix-and-flip or leasing.
Financing solutions fall into many different categories. These range from various types of investment real estate mortgages to hard-money loans and portfolio loans. You can also turn to peer-to-peer lending or crowdfunding platforms to get the money you need.
The best financing options for immovable property depend on the project. Understanding the possibilities pays off.
1. Investment property mortgages
The best option for new real estate investors could be a traditional mortgage customized to investment properties. Investment property mortgages work on your home in the same way as a first mortgage. But lending conditions may be more strict and interest rates may be higher.
Borrowers can be able to find loans for an owner-occupied property needing just 10 percent down. If you get a loan from the Federal Housing Administration (FHA), you will pay even less. But most loans from investment property require 20 percent down. Multi-family homes, ranging from duplexes to luxury high-rise apartments usually require down 25 to 30 percent.
Loans for investment property bear higher interest rates for owner-occupied properties than traditional mortgages. They can also pay 3.75 per cent or higher fees. Through charging more in interest you can cover the payments that are due at closing. In total, each percentage point in the payments would add 0.125 percent to 0.250 percent to the interest rate.
Consumers buying a mortgage for a primary residence frequently tend to do the reverse. Homebuyers will purchase points to lower interest rates and save thousands of dollars over the loan’s life. But mortgages for investment properties are often shorter than mortgages for consumers. And, they’re paid off many times before they reach maturity. Paying more in interest for these loans may make sense.
It is important to do the maths and determine if paying the fees or paying a higher interest rate is worthwhile.
As in traditional first mortgages, most lenders are looking for a 620 or higher FICO credit score to qualify you. Rental property mortgages often need a credit score of 640 or greater. You will pay higher interest rates in any case, if your score is below 740.
Often, lenders may submit W-2 forms that indicate at least two years of steady work.
If you have any shortcomings in your qualifications, such as poor credit score or lack of job experience, you might be able to cover them with a higher down payment.
Lenders consider that you have the cash to maintain the property before borrowing for an investment property. You should have cash on hand for four to six months to cover principal, interest, taxes, insurance and the payments made by any homeowners’ association.
Do you have multiple real estate investments? The lender will may like to see more cash on hand to cover the costs related to those assets.
You may use traditional mortgages at any given time to borrow money for as many as four investment properties. If you want to borrow a fifth property, find a portfolio loan or commercial residential immovable property loan.
2. Government-backed loans for investors
Homeowners often resort to government-backed FHA or VA loans to buy their first home or subsequent properties occupied by their owners. These loans are attractive, with low interest rates and down payments of as low as 3.5%.
You could be eligible for a 3.5 percent down FHA loan if you have a minimum credit score of 580. Borrowers with 500 to 579 scores will still qualify if they can put down 10 percent. When you put down less than 20 percent, you will have to pay a mortgage insurance premium (MIP) on top of your principal, interest and taxes.
For qualify for an FHA loan, the home you purchase must be your primary residence for a minimum of 12 months. You will need to move in within 60 days of closing.
To search for an FHA loan for an investment property sounds counterintuitive. After all, you buy property with the purpose of restoring and selling (often in less than 12 months) or renting it out. But if you buy a duplex or bigger home, you can live in one of the units and rent out the rest.
You can also obtain a house flipping loan from FHA or VA as long as you keep the home and stay in it for a period of 12 months.
An FHA or VA loan may not be the perfect way to start your career as a real estate developer, but if you’re low on down payment funds or your credit score is less than stellar it can give you a jumpstart.
3. Home equity loan or home equity line of credit (HELOC)
What if you don’t have cash or liquid assets of six months’ worth to back up a mortgage on investment property? In your primary residence you could consider borrowing against the equity. To fund your investment property you can use a home equity loan or HELOC.
Bear in mind that if you borrow money against your home, if you can not make the payments you risk losing it. However a cash-out refinance could effectively reduce your mortgage payments. And you might get ahead irrespective of how your new investment is doing.
So long as you don’t rely on your new investment’s rental property income to pay your primary mortgage, you can mitigate the risk inherent with a home equity lending.
If you don’t have enough home equity to completely fund an investment property, consider using a home equity loan or dipping into a credit line of home equity to borrow 20 percent of the purchase price of investment property. Then use that money as a down payment to secure a mortgage loan for the purchase.
4. Commercial residential real estate loans
Seasoned investors may consider commercial residential real-estate loans. Don’t let the name get you confused. They are not loans for commercial properties like shopping malls or big-box stores. They’re residential loans for investment experts, usually with several properties in their portfolio. These loans are built for landlords and people who keep on repairing and flipping houses.
Many of those loans are called “hard money” loans due to shorter terms and higher interest rates. Some lenders evade this designation and call their offers “mid-term loans” simply.
Hard money loans earned a reputation for high interest rates and predatory terms. But as the lending market is more competitive, many lenders of ‘hard money’ offer attractive interest rates and flexible terms.
Non-conforming loans, or loans for a mortgage that do not meet traditional bank requirements, usually require 15 to 20 percent down. Instead of evaluating your work background, lenders look at your other rental property income and your investment background to qualify you for the loan.
Your credit score comes into play to varying degrees, too. But the property’s profitability and your total portfolio of assets is key to having the best prices on hard cash deals.
Private lenders who offer hard money and mid-term loans usually want to see you have at least two investment assets under your belt. When you have four or more it is even better.
In addition, lenders look at the capitalization ratio (cap rate) to assess if a rental property is a good risk. The cap rate is the net operating income divided by the property price.
Commercial residential investment loans can help you expand your portfolio. If you are looking to repair and flip a home, a traditional mortgage with a term of 15 to 30 years might not be needed.
By turning to a bridge loan or mid-term loan, you can save considerable sums on interest. There are two forms of hard money loans with terms ranging from 6 months up to 9 years.
By comparison to traditional loans, which can take weeks to close, some mid-term borrowers pledge settlements in as little as 48 hours to a week.
5. Portfolio loans
Like hard money loans for single properties, portfolio loans are for experienced investors who are actively looking to invest in multiple properties.
Whether you are looking to invest in a new group of single-family rentals or a block of homes, consider a portfolio loan.
Just like you can save money when you buy in bulk at a warehouse sale, if you mortgage more than one property at a time, mid-term lenders provide savings. You’ll also minimize paperwork and save time because you’re only going through one loan application and one closing for several properties to borrow money.
6. Peer-to -peer lending
Peer-to -peer (P2P) loans have gained traction for both individuals and real estate investors. Often, online P2P loans can raise funds more efficiently than traditional lenders with less red tape and less regulations.
P2P loans connect borrowers with investors who are willing to finance their projects via a non-traditional loan. Many P2P lenders ask for 65 percent loan-to-value ratios, so you may not be able to borrow all the money you need for your investment project. However, there is no guarantee for P2P loans that even though you meet the requirements, the loan will be supported.
Creating an attractive listing of loans and understanding how to market it will help you stand out in a sea of investors trying to fund their next fix-and -flip or rental property. This kind of loan doesn’t suit everybody.
What options should you select for real estate financing?
One or more of these financing solutions will at different times appeal for different assets. Compare your choices through this table:
|INVESTMENT TYPE||Best For||Down Payment|
|INVESTMENT PROPERTY MORTGAGE||New investors, less than 4 properties at a time||20%–30%|
|FHA/VA LOANS||Veterans, new investors, one property at a time||3.5%–10%|
|HOME EQUITY LOAN OR HELOC||Novice investors, investors with no liquid cash who own at least one property||As low as 0%|
|COMMERCIAL RESIDENTIAL LOAN||Pro investors||15%–20%|
|PORTFOLIO LOANS||Seasoned investors, less than 4 properties at a time, numerous dwelling units||15%–25%|
|PEER-TO-PEER LENDING||New or seasoned investors, single or multiple properties||Up to 35%|
Whatever form of financing you select, make sure that when it comes to terms, fees and interest rates, you equate apples to apples.
When it comes time to take out a bridge loan or face deferred fees to pay off a traditional mortgage, you don’t want to be short of funds until it’s due. To find out your possible monthly payments before applying, use a mortgage calculator.
To start investing in real estate you do not need to be individually wealthy. But to get the financing you need, you must understand the options available. Find a lender or trusted financial consultant to guide you through the process to ensure you choose the right loan for your particular situation.
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