Spotlight

Investing in real estate is one of the best ways to build passive income and protect money against market volatility. While would-be landlords do not need the cash to purchase a home or building outright, securing financing for an investment property is more complicated than financing a primary residence.

There are several options available for those looking to purchase an investment property. The most popular loan types for investment properties are conventional bank loans, hard money loans, and home equity loans; each of these loans has different requirements and pros and cons that potential investors should consider.

Conventional loans are the most common financing option for primary residences. Unlike FHA, VA, or USDA loans which are backed by the federal government, conventional mortgages must conform to guidelines set by Fannie Mae or Freddie Mac.

Credit score, credit history, and income will determine a person’s ability to be approved for a conventional loan as well as what type of interest rates they qualify for. For conventional loans, borrowers must also show that they can afford their existing mortgage as well as the monthly payment for the investment property – without rental income.

A higher down payment may also be required. Conventional loans require a down payment of 20%; investment properties, however, often require a minimum of 30% as a down payment.

Thanks to the popularity of home improvement shows, many people think they can make fast and easy money flipping a house. For investors looking to buy, renovate, and sell a home as quickly as possible, a fix-and-flip loan may be the best financing option.

Fix-and-flip loans are short-term, hard money loans; this means that the loan is secured by the property itself. These loans are typically only available from hard money lenders, although some real estate crowdfunding platforms offer them as well. These loans may be easier for some buyers to qualify for as the primary focus is on the profitability of the property and not on the credit score or income of the buyer.

The ARV, or after repair value, is used to gauge when the loan can be repaid. This flexibility comes at a price; interest rates for fix-and-flip loans can be as high as 18%, and the timeframe for paying back the loan amount may be short. Many hard money loans have financing terms of a year or less.

Investors who already own their own home can draw on their home equity to purchase an investment property. A home equity line of credit, or HELOC, or a cash out refinance are a third option to afford buying a second home. In many cases, homeowners are able to borrow as much as 80% of the value of the home’s equity towards the purchase of an investment property.

A HELOC allows homeowners to borrow against the equity, similar to a credit card. Monthly payments are interest-only, but rates are usually variable; this means that they can increase as the prime rate changes. Cash-out refinancing comes with a fixed-rate, but extends the life of the mortgage on the primary residence. The longer loan terms can equal tens of thousands of dollars more in interest over the life of the mortgage.

by Author, Dec. 07, 2020