- Those with unimpeded access to investment property loans may have a major edge over those trying to secure financing for each and every contract.
- Real estate investment loans can differ greatly, so make sure you have the right form of loan for your next deal.
- The terms of each investment property loan will play a critical role in how you go forward with the respective deal.
Not all the industry awareness and home listings around the world would do you any good if you do not have access to investment property loans. Nevertheless, studying the ins and outs of seeking real estate investment loans, and honing the precise route to be followed in order to pursue those desired real estate loans, is one of the most critical tasks facing a potential buyer.
Even for someone with finance experience, it can be difficult to consider all the moving finance pieces that go into real estate financing (and that’s before we think about the fascinating, if often complicated, topic of crowdfunding real estate).
Understanding the values of capital is not a simple task. That said, here’s a guide to three different ways of seeking investment loans for real estate and securing the next property.
What Is An Investment Property Loan?
Investment property loans are, as you might have already guessed, loans used to buy and operate on investment assets. That is a significant difference to make, since investment property loans are usually limited to those who plan to invest. Investment property loans should also not be confused with traditional loans. Although it is theoretically possible to use traditional loans to repay a rental home, I would usually warn against it. This is because traditional loans (those received by conventional financial institutions) take way too long to collect and correlate with a lot of “hoops” to go through. Despite lower interest rates, traditional loans simply take too long to serve as a viable option for investors in real estate, with a duration of more than 30 years.
Investment property loans, on the other hand, enjoy one benefit that traditional loans can’t even get close to: ease of execution. Investment property loans, such as hard or private money loans, may also take as little as a few days to obtain. As the time it takes for them to be purchased is much more in keeping with the average investor’s timetable, investment property loans are much more realistic. So even though they come with higher interest rates, I can guarantee you that the pace at which you get them is well worth it.
Best Ways To Finance Rental Properties
Traditional mortgages, unlike many investment real estate loans, are loans not provided by the authorities (e.g. the Federal Housing Administrations, the U.S. Department of Veteran Affairs, or the USDA Rural Housing Service). These loans, rather, come from personal financial institutions (e.g. banks, credit unions), the Federal Government National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac (Freddie Mac).
Despite their predominant usage as a tool for buyers to purchase a principal residence, traditional mortgages may be employed by property investors trying to find financing with generous conditions.
Though you are very likely to obtain much less-stringent conditions than you’d using a loan from a hard money lender, traditional mortgages do need a 20 percent down payment of their property’s cost if you’d like to avoid paying private mortgage insurance.
To be approved, the lender will examine the following:
- Private credit rating and credit history (to ascertain your interest rate)
- Income and resources
- The capacity to cover any present mortgage on top of your investment property’s mortgage
- Most creditors would also prefer you can pay at least six months worth of mortgage
You’re not eligible for a conventional mortgage if you’re able to say”yes” to any one of these:
- Declared bankruptcy or had a foreclosure in the previous seven years
- Possessing a debt-to-income ratio over 43%
- Possessing a credit rating below 650
Hard Money Lenders
Hard money lenders are short-term loans usually used by home developers whose aim is to rapidly renovate/develop properties and market it. The phrase “hard money lending” is, in essence, a misnomer; it does not refer to how challenging it is to apply for; it refers to firmer conditions of borrowing relative to other forms of lending.
Like bank loans, hard money lenders don’t look at the borrower’s credit record (which may be a positive thing if the reputation is a little shaky). Instead, hard money lenders look at the valuation of the property — specifically, after-repair valuation (ARV) — to determine whether to approve the loan.
Hard money loans act as one of the strongest sources of funding for today’s investors for one basic reason: speed. Hard money loans will also be made with a moment’s notice if you’ve lined up the right partner. That said, it’s the pace at which you can get the funds that gives you an edge over the competition. When others are waiting for bank acceptance, you can proceed to make an bid.
Pros of Hard Money Lending:
- Secure loans faster: Banks will take months to approve your loan due to tight regulations. Hard money lenders, on the other hand, don’t take nearly as long to make a call. This is especially important for developments with tight deadlines.
- Flexibility in collaterals: The investments are typically collateral for loans. However, hard money lenders can also accept personal assets, such as your residential property or your retirement account.
- Flexible terms: One of the best things about working with private lenders is that you can discuss loan terms. There are two key areas to negotiate: repayment terms and fees.
Cons of Hard Money Lending:
- Shorter repayment period: Hard cash lending is for all those who immediately want money to come up with a home and place it in the market, quickly. Therefore, these kinds of loans have shorter repayment intervals compared to traditional funding. Ensure that you understand the repayment provisions prior to taking hard money.
- Price: The catch with the ease of hard cash lending is that it includes high rates (may be up to 10 percent points greater compared to traditional lending) and greater fees (e.g. origination and loan-servicing prices, closing costs).
Private Money Lenders
The term private money lenders is often used interchangeably by hard money lenders. (Both are ways of borrowing in the more conventional domain of a financial institution.)
The main distinction is that private borrowers are not ‘qualified lenders.’ They are not affiliated with any loan organization. Private borrowers are typically individuals on your network who have extra money who want a nice ROI for their money.
Popular sources of private capital may include:
- Parents, relatives, neighbors or co-workers
- Associates in your primary circle for friends and family
- Certified investors, people you meet through networking or ads (remember you need to first build legitimacy before asking for more funds)
There is less formality involved with this type in lending. As such, this is the most suitable approach for prospective buyers and experienced buyers who have been turned down by banks. Credit is not typically the main consideration, but instead your determination to start a successful company (and the desire to portray yourself as professionally as possible).
Investment Property Loan Rates
As I have already mentioned, there are a variety of forms of investment property loans for borrowers to choose from. That said, there are two real estate investment loans that borrowers most want: hard money loans and private money loans.
Hard money lenders will typically apply for about 11 to 15 percent and about five points (additional initial percentage payments depending on the volume of the loan). It is worth noting, though, that there are no requirements for universal hard money lenders; and comes complete with a different set of parameters. Private money lenders, on the other hand, would settle for a bit less, because they are typically those inside your own network. It’s not uncommon for private money lenders to charge interest rates upwards of 12%, but without the points hard money lenders are looking for.
While we’ve discussed several various forms of real estate investment loans, some of which might not be a perfect match for you as a real estate buyer, realizing which road you’re not heading down may just be as freeing as recognizing the road you’re going down.
Through taking a systematic approach to your finance, and by narrowing down your options for investment property loans, you can be much closer to learning the art of taking instant, major action on a real estate transaction, when a successful one presents itself.