It only makes sense to take out a loan to invest when the investment return is high, and the risk level is low. It is usually imprudent to invest a loan in risky deals like the stock market.
This guide will focus on investment property and the different financing options available for this venture.
Financing Investment Property
Buying an investment property is an excellent way to expand your portfolio. You can choose to flip a property, buy and hold land for future use, or rent properties. Investment properties have a sky-high start-up cost compared to other investments like the stock market.
Once you’ve settled on real estate investment, conducted your research and found an excellent deal, you have to figure out how to finance your investment.
There are different ways of financing investment property. There are some minimum requirements that you have to meet in order to secure this kind of loan. Picking the wrong loan type can affect your investment’s success, so you must understand the conditions of each type of loan and compare them before submitting your application.
The available financing options include:
1. Traditional Bank Loans
Conventional banks usually require that you provide a 20% deposit of the home’s purchase amount. However, this is not the case for an investment property that requires a 30% down payment.
Your credit history and credit score play a significant role when applying for conventional financing—they determine your loan eligibility and interest rate.
The loan provider also analyses your assets and income. You must also prove that you can afford the investment property monthly loan repayments.
2. Private Cash Loans
These are loans from one person to another. Private money loans usually come from the investor’s family and friends. If your loved ones can’t finance your venture, you can start attending property investment networking events to look for private money lenders.
The interest rates and loan terms vary from one lender to another, depending on the relationship between the borrower and the loan provider. These loans are normally secured by legal contracts that give the lender the authority to take possession of the property if the lendee defaults on the loan.
These loans can create rifts in relationships, so be careful when choosing your private money lender. Alternatively, you can decide to take out a loan from platforms like Gday Loans which will connect you with lenders who provide guaranteed loans for property investment.
3. Tapping Your Home Equity
You can secure investment property by tapping your home equity through a home equity line of credit (HELOC), cash-out refinance, or home equity loan. You can borrow a maximum of 80% of your home’s equity to buy and renovate an investment property.
This financing option has upsides and downsides, depending on the type of loan you select. For instance, if you choose a HELOC, you can take out a loan against the equity the same way you would with a credit card.
The monthly payments are usually interest-only, and the rates vary—the rates can increase if the prime rate changes.
Cash-out refinance has a fixed rate, and it can prolong the existing mortgage’s life. An extended loan period will attract more interest for the primary residence.
4. Hard Cash Loans
These are short-term loans suitable for flipping investment properties rather than purchasing and holding property, developing it, or renting it out.
Even though you can use a hard cash loan to buy a property, then pay off the loan instantly with a home equity loan, private money loan, or a conventional loan, it is more cost-effective and convenient to start with one of the alternatives if you’re not planning to flip the property.
It’s easier to qualify for a hard money loan than a conventional loan. As much as lenders consider income and credit scores, the focal point is the property’s profitability.
The lender uses the property’s after-repair value (ARV) estimate to determine if you can repay the loan. You can get this loan in a few days as opposed to conventional loans, which take longer.
The main drawback is that hard money loans are costly, with up to 18% interest rates depending on the loan provider. The loan terms are also short—less than one year. The origination and closing fees are also high.
Wrap Up
Taking out a loan to invest in property is a risky venture that can bring high returns. You don’t have to struggle to find funds for this investment opportunity if you know where to look. Consider the financing options above to secure an investment property.
