Diving into real estate investing is an exciting journey, but it’s important to approach it thoughtfully. Taking the time to prepare and explore your options for purchasing a property can make a huge difference. With various ways to fund your investment, you’ll want to choose the options that feel right for you and fit your unique situation.
Understanding elements such as interest rates and mortgage expenses allows you to prepare in advance and make choices based on what you can ultimately afford without incurring losses. This article aims to provide you with various options, enabling you to make a well-informed decision.
Investment Property Loan Options
Conventional Loan
A conventional mortgage loan originates from private lenders, including banks, credit unions, and mortgage companies. This represents a traditional financing option, where you make monthly mortgage payments for your investment property.
Conventional loans can have a fixed or variable interest rate depending on the lender. You typically need to provide a down payment and collateral in case you fail to pay according to the terms of the deal. The down payment could range between 3% and 20% of the investment property's purchase price.
Pros:
- No government restrictions
- Faster processing
- Lower or standard interest rate
- Potentially no private mortgage insurance (PMI) requirements
Cons:
- Stricter credit requirements
- Larger down payment
- Could require collateral
Note: Some conventional mortgages, like conforming loans, can be guaranteed by two government-sponsored enterprises: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). These must meet the dollar limits set by the Federal Housing Finance Agency (FHFA).
Hard Money Loans
Seeking hard money lenders for financing is often viewed as a last resort among options for investment property loans. These loans are not provided by banks or the government but rather by individuals or companies. It's an excellent choice for real estate investors who need to access funds quickly.
There are certainly some downsides to private money loans. If that weren't the case, everyone looking to buy an investment property would choose hard money loans.
Pros:
- Fast approval
- No credit requirements
- Flexible loan terms
Cons:
- High interest rates
- Higher costs and fees
- Shorter repayment period
- Risk of losing collateral
Federal Housing Administration (FHA) Loans
FHA loans are government-backed mortgages that are suited for investors with lower credit scores. This makes it ideal for first-time homebuyers who find it difficult to find real estate financing through other means. It does, however, provide lower financing amounts. This type of real estate investment loan has subtypes such as:
- Home Equity Conversion Mortgage (HECM)
- FHA 203(k) Improvement Loan
- FHA Energy Efficient Mortgage
- Section 245(a) Loan
Pros:
- Lower minimum down payment
- Lenient credit requirements
- Assumable loans
Cons:
- Upfront mortgage insurance premiums
- Loan limits
- Property requirements
Veteran Affairs (VA) Loans
VA loans are government-backed mortgages that offer favorable terms for eligible veterans, whether or not they qualify for rental property loan options. Other than lower interest rates and no down payment needed, individuals with less-than-perfect credit can still be eligible.
To be eligible for real estate financing, you must be a veteran, be on active duty, serve at least 90 consecutive days during wartime or 181 days during peacetime, or have 6 years of National Guard/Reserve service.
Pros:
- No down payment required
- No PMI required
- Limited closing costs
Cons:
- Eligibility limitations
- Property requirements
- Potential loan limits
- Closing the real estate deal can take a while
Home Equity Loan
A home equity loan is when you get a second mortgage by borrowing against the equity of your primary residence. The amount can be based on your home's current market value and mortgage balance due.
The equity of your home becomes the collateral. The main disadvantage of this option is that if your real estate investment doesn't pan out, you could lose your home and investment property. Like other loan options, it largely depends on the rental income of your rental property.
Pros:
- Lower interest rates
- The amount depends on the equity of your home
- Longer payment terms
- Potential tax benefits
Cons:
- Risk of losing both real estate assets (collateral and investment property)
- Equity qualifications
- Closing costs
- Real estate value decrease can lead to bigger debt
Ensuring Your Investment Property Loan is Paid Off
Whether you borrow from hard money lenders or get a traditional mortgage loan, making sure your investment property is profitable is crucial to paying it off and not losing anything in the process. Knowing your options is just as important as learning the best ways to catch up with the agreed-upon payments.
Create a Detailed Budget
Develop a budget that tracks both your expenses and rental income to determine whether you need to cut back and allocate more money towards your loan. Financial planning is key to balancing your cash flow according to your needs, avoiding the need to get additional loans to avoid losing assets from your investment portfolio.
Refinance When Rates Drop
Monitor interest rates and refinance at a lower rate when they drop. This can save you money and shorten the loan term for your rental property investment. Other investors try to refinance their hard money loans to conventional home loans to avoid large balloon payments.
Maintain Good Credit
Refinancing becomes more possible when you have a good credit score. You'll get lower interest rates and qualify for loan options that might require certain credit scores. It generally increases the chances of you paying off your rental investment property.
Increase Your Income
Managing residential properties is a different responsibility altogether. Increasing your monthly rental income comes with financial and personal benefits you might not afford to pass up on. When in doubt, hire a property manager who can help ensure that your real estate investment continues to be profitable.
Let Us Help You Reach Your Goals
Buying investment properties is only the beginning. Maintaining and managing your residential rental property can be overwhelming, and the smallest misstep can prevent you from making mortgage payments.
CRM Properties can offer professional property management, which can help your business thrive. You passively produce financial wealth while staying stress-free.
You can contact us to learn more about our services. Let us help you secure your investment plans!