If you are thinking about buying an investment property but don’t have the cash needed in your bank account, do not despair! Thankfully, there are more property investment funding options than you likely realize. Selecting the best option for your real estate investment plan and particular situation can even save you thousands of dollars.
Below, we’ll explain the different loans available for financing your next investment property and the pros and cons of each.
Conventional Loans
A conventional loan is the most common type of mortgage for property investment funding. You provide a down payment and the bank gives you the rest of the money in exchange for a lien on the property secured by a mortgage. Conventional loans are a good solution for buy-and-hold investors building a portfolio of income-producing rental properties. They are not typically used to flip houses, because these mortgages are underwritten for a term of 15, 20 or 30 years. Conventional loan lenders are not interested in providing short-term financing.
Federal Housing Authority (FHA) Loans
Another great option for property investment funding is an FHA loan. FHA loans are government-sponsored loans that incentivize people to purchase a home by offering a borrowing option in which the buyer needs to put down only 3.5%. The FHA doesn’t loan the money; it guarantees the loan for the lender. Since the FHA takes on some of the financial risk by insuring the payment of the loan if the borrower defaults, it’s easier for borrowers to qualify for an FHA loan than a conventional loan, and the lender is able to offer a competitive interest rate.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage is exactly what it sounds like: a loan in which the interest rate fluctuates with the overall market interest rate. There are a lot of variations on ARMs.
With most ARMs, your interest rate is adjustable for the full term of the loan, but there are “hybrid” ARMs with which your rate is fixed for a certain number of years before transitioning to the adjustable rate. Some investors will stray away from ARM financing for their property investment funding because of the risk of increasing expenses on their investment properties.
Hard Money
Using a hard-money loan as a means of property investment funding is another great option for many investors. The term “hard money” is fitting, because the lenders use the hard asset (the property) to secure the loan. Hard-money loans are short-term loans, most often used by borrowers who buy to fix-and-flip. Typically, you’ll get hard money to cover 70–80% of the property’s purchase price before rehab, so the lenders must be confident that the property is worth more than the loan and their cost to liquidate the property if you default. Hard-money lenders typically charge high interest rates and include other fees such as loan origination fees.
Home Equity Line of Credit (HELOC)
Lastly, a home equity line of credit, is what people can use if they have already purchased a home and have some equity tied up in it. For example, let’s say you’ve lived in your primary residence for 10 years, all the while paying down the mortgage and benefiting from appreciation. The appraised value is now $500,000 and your mortgage payoff is $250,000. You can take out a HELOC to tap into the $250,000 of equity you have in the property ($500,000 value minus the $250,000 loan outstanding). You can then use this $250,000 to use toward your property investment funding.
In conclusion, an investment property can be a long-term commitment or a short-term endeavor, such as “house flipping”, where a home is purchased, renovated, and then sold at a profit. Regardless of the specifics, the needs of real estate investors are different from the needs of a typical home buyer, so working with a lender who understands your goals is beneficial.
Here at Real Estate Funding Solutions we are always ready to help you with your property investment funding strategy. We help you with commercial lending, residential lending, fix & flip, as well as many other real estate financial products. Email us at info@realestatefundingsolutions.com to learn more.