Everything You Should Know About Investment Property Loans
Are you planning to invest in a property to use as a vacation house or lease out to generate revenue? If yes, you are one of the smart ones. You understand that your investment can become a reliable source of income for you.
Getting an investment property is quite a popular trend in the current real estate market. To help you out, our real estate investment gurus have compiled this guide that explains how you can get investment property loans.
What Exactly is an Investment Property?
Essentially, an investment property is any residence through which you can earn rental income or flip and sell it for a profit. An apartment, condo, house, or home can be counted as a rental property, even if you decide to live in it for part of the year. Investment properties usually include one- to four-unit residential homes rather than commercial properties, like shopping centres or apartment complexes. But that is not to say that investing in commercial property is a bad thing.
What are the Different Types of Investment Property?
Generally, people invest in three types of property - vacant lands, commercial property, and residential properties.
People intend to build their equity investment in vacant lands to sell them for profits. Alternatively, they create subdivisions within them. Acquiring investment property in this fashion is quite challenging as no rental income is generated. Financial institutions have strict loan requirements for raw, undeveloped lands.
Commercial properties such as large apartment buildings, warehouses, or mixed-used properties are more financially rewarding since they serve as sources for regular cash flows. However, these types of properties come with slightly more risks and, of course, a substantial investment cost.
Residential properties hit the sweet spot between risk and price. Residential properties include duplexes, triplexes, houses, or just any other property that’s dedicated to providing a living space of up to 4 units. These properties do not require as much upfront money while still providing an excellent source of income.
Each of these real-estate investments comes with different obligations. However, if you are considering building your wealth, residential and commercial properties are the best options.
What Should You Know About Investment Property Loan?
Investment property loans have higher mortgage charges and stricter lending standards than standard mortgages, including higher down payment amounts. You will have to pay a down payment of at least 10%-25% on a single-family home to be eligible for such an investment.
If you have good credit scores, you can avail down payment of less than 10%.
However, getting a property loan for a commercial property may require a down payment of 25%.
Requirements for an Investment Property Loan
Taking an investment loan is quite similar to the mortgage you’d take out for your residence, albeit with stricter requirements. Let’s dig into know some lending guidelines for rental property loans.
Succeeding in Rental Income
You might also use the potential rental income for a hard money loan. Lenders would credit $0.75 on the dollar considering the current market rate when factoring in rental profits as part of your bid.
For instance, if the market rate for a rental parallel to the one you’ll own is $1,000 a month, the lender will credit $750 per month into your income.
Cash reserves are funds that are kept for unforeseen situations. While some financial institutions come with obligatory cash reserve limits based on the type of investment property loan and other factors, some do not. Ensure you have enough funds to cope with any emergency or excess expenses that you may incur for repairing and maintenance costs.
Deciding on getting a property loan can be difficult as it is a big decision, but if you keep these things in mind, it will be easier for you to get a hard money loan.