fbpx
Google Rating
4.7
Based on 64 reviews
×

If you’re like many investors today, you’re not getting excited over meager returns from CDs and remain concerned about future inflation, which could wreck bond investments. That leaves investments that insulate or protect you from inflation and the chaos it can cause to your investment portfolio, making real estate investments a logical consideration.

While cable television is filled with stories of quick riches in the buy and flip real estate market, there is also high risk. People interested in long-term investment with excellent growth potential are often focused on investment properties that grow in value over time while bringing in an income that ultimately allows their investments to pay for themselves. Rental properties, in other words.

Since most would-be investors don’t have the kind of money required to pay cash for their investment properties lying around waiting for them to spend, it means they’re going to have to find investment property loans. Historically, that has been a task much easier said than done. There are still challenges that investors must overcome to finance their investment dreams. But the rewards are worth a little additional work on the front end of things. Many people fund their lifestyles and retirements one investment property at a time.

Why is it More Difficult to Finance Investment Properties?

Traditional lenders, like banks and mortgage companies, operate under a fairly simplistic formula to determine if they are prepared to lend money. Factors that carry weight in these determinations include things like:

  • Your debt-to-income ratio. This is the amount of your monthly debt compared to your monthly income. A low DTI indicates that you manage your money well and aren’t overburdened by debt.
  • Credit score. A good credit score is essential for keeping your interest rates low and ensuring that you can qualify for credit when the time to invest in your property comes along.
  • Credit utilization. This is the amount of credit available to you compared to the amount of credit you’re actually using. A credit utilization score of 30 percent or less is considered ideal by many in the business of lending money for investment properties and more.
  • Your available down payment. This is the amount of cash on hand that you have available to invest. Most investment property lenders will require 20 percent or better for your down payment before agreeing to lend money for the property.
  • Payment history on existing or previous mortgages. Whether for mortgages or other types of loans, lenders like to see a strong history of timely payments. However, when it comes to mortgages, and loans that offer lengthy terms as mortgages, do; they want to see evidence that you can sustain the habit of paying your mortgage on time for the long haul.
  • Your personal income. The bottom line for borrowers is that lenders want to know, without a doubt, that you can make the payment when they lend you money. You will need proof of income before you can get a mortgage loan for your investment property.

The bottom line is that they want to see evidence that not only can you pay the additional loan, but that you are likely to prioritize these payments. This is critical for banks and mortgage companies who often have much higher requirements and standards to extend credit for investment properties than they do for properties in which you intend to live.

They are also going to want to know as much about the property as possible. Including information related to the current value of the property. The location of the property (is it an up and coming area that is prime for development or one that is going into a state of decline?), the condition of the property, and the likely value of the property once you make your investment in the property to get it ready for your investment plans. For instance, if you’re renting, how many units will the property have, how much will the rent on each unit be, and how long before you’re ready for your first tenants?

It goes deeper than that, though. Banks want to know how you plan to use your investment property and that you have a plan for doing so. They will have questions and they expect you to have answers to them before they lend you money. They want to know things like:

  • How do you plan to use the property as an investment (rental, fix and flip, etc.)?
  • How long before the property will bring in income?
  • How much additional money will you need to invest in the property to have it ready to go?
  • Have you done your due diligence for obtaining permits, inspections, appraisals, etc.?
  • Have you obtained estimates for essential repairs?

They want to see that you are taking your investment seriously and that you have a plan in place for making it pay off for you quickly.

The reason banks are so adamant to have this kind of information about you and your plans for the investment property is that people are much more willing to walk away from investment properties when the going gets rough than they are from the home their family’s call home. They want to be confident that they can get their investment out of the property if you are unable or no longer interested in living up to your end of the bargain. The more information you provide and the higher down payment you can offer, the greater your odds of approval from traditional lending institutions.

What Makes Real Estate and Property an Attractive Investment?

There are many reasons people find real estate such an attractive option when it comes to investing. One of the most important is that real estate and real property, by and large, appreciate over time. That means they grow in value rather than losing it. Most other types of investments will depreciate in value over time. The real estate market may experience little ups and downs along the way but it mostly grows in value over time. Substantially so. That means that even if you purchase a property intending to rent it out for years, by the time you, or your children, as the case may be, decide to sell, it should be worth considerably more than your purchase price.

While that is certainly an excellent reason to invest in property, it is far from the only reason. Additional reasons to consider include:

  • Your investment can generate year-round income. Renting or leasing your property can create income for you throughout the year, allowing the property to essentially pay for itself.
  • Countless “gurus” have claimed that investing in real estate has made them successful and wealthy. You believe that it can be your path to wealth, comfort, and financial security.
  • Works for you in any type of economy. People always need homes to live in, after all.
  • It can almost always be leveraged when you need fast access to cash for other investment opportunities.

These are just a few of the many examples explaining why investment property loans are worth your effort most of the time.

Types of Investment Properties

Real estate and property investors have different interests when investing in property and different expectations. There are essentially three ways in which you can invest in real estate:

  1. Buy and hold. Often the case when you buy apartments, duplexes, or even business properties that you intend to operate out of, rent, or lease to others. These are long-term investments that can make you a great amount of money over time, especially if you vet the property well before investing.
  2. Buy and sell. This is what fix and flippers do. Though some will flip properties without ever putting so much as a paintbrush to the property. The idea with these types of properties is to put as little real money into the properties as possible while turning it over quickly to earn fast money. Though sometimes, flips become much more involved, requiring more time than initially hoped for. Markets turn, surprises turn up during flips, etc. Be prepared to stay the course if necessary if you want to make a profit on these types of investment properties.
  3. Buy and develop. With this type of investment property, you buy the property with plans for specific developments to take place on that land. From housing developments to shopping malls and all kinds of spaces in between, this can be extremely profitable if you’re in the right place at the right time. It also carries big risks that must be considered as well.

Of course, these are far from the only ways you can turn ordinary properties into income for yourself or your family. However, you will need a solid plan for each step of the way if you plan to finance your property investment.

Types of Investment Property Loans

There are several options to consider when it comes to funding your investment property. The right loan for you will vary widely according to the type of investment property you wish to purchase. The following are among the most common.

  • Conventional mortgage loans for investment properties. These work like regular mortgages though they often carry higher interest rates and higher down payment requirements than a traditional mortgage loan.
  • Hard or private money loans. These loans are often unattractive to investors because of the high potential costs associated with them. Many are very short term loans that carry higher-than-average interest rates making them punitive for anything resembling a buy and hold investment property.
  • Fix and flip loans. These loans are for the price of the home and the costs involved in rehabbing the home so you can sell it for a higher profit. They are short-term loans that often carry substantial interest rates. The faster you pay these loans the better it is for you. Successful “flips” can be highly profitable making them well worth the risk for some investors.
  • Home equity loans for an investment property. One that should only be approached with careful thought and consideration. Your home is the security for this loan, so if it fails to produce, both properties are on the line.

As you can see, there are plenty of opportunities available to investors looking for loans. The challenge lies in choosing the one that works best for your investment plans, your current financial status, and your future goals.

Investors today have so many more options than were available to them a decade ago. Use these loans to help you achieve your financial goals and dreams by investing in real estate. The risks may be high, but so are the potential rewards. Minimize your risks by investing in inspections, appraisals, and studies of the area before investing so you can enjoy a long and fruitful career in the property investment industry.