Here’s the simple truth: real estate investing is a reliable source of consistent income. Those in the financial sphere consider real estate investing to be a “passive” source of income. Why? Being a landlord for either a private or corporate residence means a monthly income from renters that is based on a contractual agreement – meaning that there isn’t necessarily a daily grind involved in leasing out your property.
But there seems to be a mistaken belief that real estate investing is an elite enterprise. This is probably because real estate investors do need a certain amount of capital to get their business going. However, we’re here to tell you that anyone can become a real estate investor and that it’s easier than you think to build your wealth.
It’s time to correct the misconception and start taking the first steps to your real estate investing journey.
The 5 Loans You Need To Know About
When your real estate investing business is just getting started, and you need to bankroll your enterprise, there is no getting around loans. You will need one, especially for your first property. And while it’s important to choose the right bank to work with, it’s even more important to go to thank bank already informed of your options. You’re about to get into a business where you are the boss – and that starts with selecting the loan that is right for you.
Conventional Mortgage Loans
A conventional mortgage loan is the most common investment property financing option among property investors. A conventional mortgage is simply a loan that private entities like banks or mortgage brokers offer for real estate investment purposes. It conforms to guidelines set by Fannie Mae or Freddie Mac, and it’s not backed by the federal government.
Obtaining conventional mortgage loans for investment properties varies from one state to another, but there are some standard requirements for the real estate investor to qualify. For example, property investors should expect lenders to require 20% of the income property’s purchase price as a down payment. This large down payment means property investors are less likely to default and tend to have a more secure financial standing.
Hard Money Loans
Best known for Fix-and-Flip real estate investing, in which you buy cheap investment properties, renovate them, and quickly sell them for a profit. You can get hard money loans from professional individuals or companies that lend money specifically for real estate investing purposes. The best thing about these types of loans for investment properties is that they are faster to secure than conventional mortgage loans.
Although this is one of the common types of loans for investment properties in real estate, it does come with a list of formalities, documentation, and guarantees. Another thing to keep in mind before approaching hard money lenders is that these are short-term and they come with higher interest rates. Hard money lenders, they evaluate the value of the income property you’re planning on buying to decide whether or not to grant you the loan, so this type of loan can be tricky for first-time real estate investing.
Private Money Loans
Private money lenders are not professionals like hard money lenders – they are just everyday people with extra money who are willing to work with you. Private money lenders can be within your personal network or even other property investors.
These loans for investment properties are great for property investors who were turned down by banks. They come with fewer formalities thanks to the close relationship between the real estate investor and the lender. They don’t involve strict conditions, interest rates are typically lower, and the length of the loan is flexible and negotiable. But keep in mind that these loans for investment properties are secured by a promissory note or the existing mortgage on the income property. If property investors don’t pay off the loan in due time, private money lenders can foreclose the investment property.
Home Equity Loans
Home equity loans for investment properties are a type of debt that allows homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowner’s equity and the property’s current market value. In most cases, it’s possible for a real estate investor to borrow up to 80% of the home’s equity value.
Home equity loans for investment properties are essentially a second mortgage, but they have higher interest rates than the first mortgage. As with any mortgage, if the real estate investor doesn’t pay off the loan, the lender gets to repossess the investment property and sell it to satisfy the remaining debt. Plus, if property investors default, lenders get to keep all the money earned on the initial mortgage and the home-equity loan.
If you’re looking at a commercial property, then you’ll need another financing option – a commercial investment property loan! The main difference is that to get these loans for investment properties; property investors need to have a solid business plan coupled with a good credit score.
There are different commercial investment property loans, each with specific terms and qualifications that make them suitable for certain types of commercial properties. When going for these types of loans for investment properties, a commercial real estate investor should expect to cover a down payment of around 15% – 35% of the purchase price. This financing option typically lasts for 1 – 3 years with 8% – 13% interest rates.
A Few Things To Consider Before Real Estate Investing
There are a lot of different loans, though, and most of them can only be used for certain types of properties. This means that there are a few things to keep in mind as you decided on the loan you want to use for real estate investing, such as the type of property you’re interested in buying, how you plan to use the property, and any renovations the property might need before it is suitable for renting. You will also need to consider the location of the property, since different areas have different property taxes.
Knowing your property and your plans for that property is vital to obtaining a loan. In fact, the chances are that the bank you work with will want all of this information in the form of a business plan. The bank will also want to know about your personal finances, since any capital you have – your house or your car, for example – will be analyzed in your loan application. These factors absolutely matter when selecting the type of loan you want.
But here’s the good news: once you have a loan, your real estate investing journey is well underway, and you can officially call yourself a real estate investor! The first loan is the biggest step. Everything after that is a walk in the park.