To those new to the investment world, finding a real estate isn’t the hardest part! For a lot of people, choosing the right form of loan will make or break their offer for their next real estate investment. Real estate developers are often on the lookout for the next big deal but it can be anything but easy to find financing for these ventures.
Underwriting for several lengthy loan applications. And all kinds of loan loopholes can break. That is why it is important for good investment to know the right form of loan for your investment.
Below we break down how to find the right loans for real estate investment, so you’re never stuck waiting for your property to be financed.
Know Your Kind of Real Estate Investment
Knowing what your investment is will make your search for the right form of loan and lender much simpler. A home equity loan obviously won’t work for your investment if looking at commercial investments.
It is also important that you have a good understanding of the type of investment you are looking at, and how you can use it. The most growing form of investors in real estate are:
Flips: House flippers and fixer-uppers. Fixing and flipping are a perfect way for investors to get their feet wet and make big gains on home improvements. Such forms of investments are one of the easiest for conventional, private, and fix and flip borrowers to find finance.
Rentals: Rentals are a favorite for producing passive income and creating long term wealth – from single apartments to home or even multi-family investments. You may have a greater range of loans available, depending on the type of apartment, but bigger complexes are more difficult to find loans for.
Land: With no tenants or upkeep, and limitless possibilities, investment in land is a perfect way to create residual income. Land can be a serious money makers in the right places, such as outside major cities, as new businesses, apartment complexes or more seek to develop. Home equity loans, traditional mortgages and certain borrowers with hard capital are providing loans for land investments.
Commercial: Examples of commercial real estate assets are warehouses, office buildings and even some apartment complexes. Although these investments can be high earners, it can be difficult at best to find the right loan to fund those investments! Commercial property investment loans, and even hard money loans, are a great choice for these investments.
If you know the type of investment you are making, you can start weighing the pros and cons of each loan form.
How To Use Traditional Bank Loans For Investing
If you currently own a home, then this form of loan has been used before by you. Standard mortgage loans are priced by taking credit score, down payment and history of jobs from the borrower. They combine these factors to decide if the borrower will be able to afford the next mortgage. Interest rates on the borrower’s loan can vary, and the period periods will last for up to 10-30 years.
Traditional loans are commonly used by investors in real estate because they offer small monthly payments and lower interest rates than some of the other options mentioned below. In comparison to your typical mortgage, investors in real estate are supposed to afford more than one mortgage comfortably (if they have a home residence, and then purchase an investment). When they have more than one mortgage, payments for a down payment are likely to take several months.
Many lenders to real estate investment would need some sort of down payment. They will require up to 20 percent of the purchase price of the property for conventional loans.
Customary bank loans can be used for:
- Fix and Flips Investments
- Some Rental Investments (Rental Homes, Holiday Apartments, Certain Multifamily Housings)
- Investment in Land
How To Use Hard Money Loans For Real Estate Investing
Hard money loans are credits that vary in several different ways from the regular bank loan. Hard-money borrowers do not directly use income or credit history of the borrower to assess the loan. Instead, they use the value of the house, and the value of a house after repair (if applicable), to calculate the loan interest. Hard money lenders are easy to fund because they don’t need extensive paperwork to authorize the loan, they use the valuation of the property for the loan.
Hard money loans can accept an investment loan in 12 hours or less, and can even fund a property in 2 days or less. Hard money loans are created for investment in real estate, thus they have shorter term periods and higher interest rates. Interest rates for hard money loans will vary 12-16 percent, and the duration of the loan is between 6 months and 2 years.
Because these loans are tailored for real estate developers, they can be used for a wide variety of investment activities.
Loans with hard money can be used for:
- Fix and Flip Investments
- Rentals Investments (All types)
- Some Land Investments
- Some Commercial Investments
Hard money lenders work closely with creditors to provide fast funding and can be savers for deals.
How To Use Home Equity Loans For Your Investments
Home Equity Loans may be used to purchase a secondary home, but they pose more risks than conventional hard-money loans.
You can use your home valuation as either a home equity loan, or cash-out refinancing, if you are a homeowner. You can use a Home Equity loan to fund a real estate purchase. You can borrow up to 80 percent of the value depending on your home to fund your next purchase. Tariffs vary depending on the market and its current state, the credit and whether your home’s prime rate shifts.
That kind of loan isn’t for everyone. This would not only increase the value of your loan, but with this form of investment, you need to carefully consider the possible benefit of an investment. When you default on this kind of payment it might jeopardize both assets.
Loans for Home Equity Can be used for:
- Fix and Flip Investments
- Certain Rentals Investments (Rental Homes, Vacation rentals, Some Multifamily Rentals)
- Land Investments
How To Use Commercial Investment Property Loans
Commercial investment is a perfect way to produce passive profits, but it’s more difficult to fund a commercial real estate than other forms of investment. Using Commercial Property Loans is the solution to many who are hard to find and more expensive to finance.
A good credit score and business plan are a must for real estate investors searching for this form of loan. To get accepted by private money lenders or conventional lenders for this form of loan, you have to be able to prove cash flow. Another prerequisite for these forms of loans is getting a down payment. Many real estate buyers would expect 15-35 percent of the purchase price of the property to see a down payment. Long rate and interest are expected to differ.
They can be used for:
- Commercial Investments
- Large Multifamily Rentals
- Commercial Land Investments
Commercial investments need a consistent exit and cash flow plan. Paired with the right form of loan, you will begin to make the most of your investment in no time.
Not all loans are created equal, and what works well for one borrower can not be the case for others, with differences between states, terms and rates. It’s important to find the right funding for your investment to make better investments.
- Know Your Form of Real Estate Investment: If you’re flipping you’ll find a wide range of loans for your property, but you’ll have to search for the right lender for land. Know what your investment is to help yourself find the right terms for your property, before searching for lenders.
- How to Use Conventional Bank Loans For Investing: A conventional mortgage would provide you with the lowest rates and longest terms for flips, property, and some rentals. Traditional loans will take longer to repay, and will be dependent on your debt.
- How to Use Hard Money Loans For Real Estate Investing: Quick loans for real estate investors only. Hard money loans offer flexible terms, rates and base their value off the property, not the credit. They’re perfect for flips, leases, land and a few commercial investments.
- How to Use Home Equity Loans For Your Investments: Others use a house equity loan to buy a flip, rent or even land. Though this is a risky tactic, it gives investors flexibility in finding and purchasing properties on their timeline.
- How to Use Commercial Investment Property Loans: Warehouses, apartment complexes or even office buildings are commercial properties that can benefit from these loans. Although conventional banks or private money lenders can provide these, having a sound business plan, strong credit score and down payment can help you obtain this form of loan.
What kind of loan did you use for investments?