Do you want to make investments like the “big sharks,” those large investors with seemingly endless amounts of funds who gobble up big buildings and vast amounts of property? If so, you need to look into investment properties. A sizeable percentage of wealthy investors swear by real estate as a great source for income. In fact, real estate investment income can outpace the return on other types of investments by as much as three times the amount of revenue.
If you haven’t started looking at getting investment property loans, now is the time. Mortgage rates are still affordable, and real estate property values remain high due to the shortage of homes for sale.
What's in this article?
The amount of money you could make is incalculable. First, let’s learn how to get started with your very own investment loan.
What Are Investment Property Loans?
These are loans to acquire property that will produce income either through renting the property or by renovating the property and selling it for a profit (often called “flipping”). Loans to acquire property for rental consider both the buyer of the property and the potential income from the property.
In order for the property to qualify for purposes of renting, it must be rent-ready. The property has to be suited for short-term or long-term rentals. (That said, most investors use them for long-term rentals because of the stability.)
This means that you can use this kind of loan for either investment rentals or vacation rentals, as long as the property qualifies. The following home types are eligible:
- Single-family homes and two- to four-dwelling units
- Condos
- Townhomes
If you’re looking to use one of these types of homes for your rental property, you should pursue an investment loan.
Ready To Take Your Next Step?
How to Get an Investment Loan
Getting an investment loan isn’t as far out of reach as it may seem. As is the case with traditional mortgage loans, banks and private lenders also offer investment loans. You have to shop around for the right kind of loan for your needs.
When you’re hunting for the investment loan best suited for your needs, you’ll notice that there are several kinds of loans from which to choose.
Be sure to find the type of loan that you want before you start talking to potential lenders. Here is a list of the most popular investment property loans:
Conventional Mortgage Loans
The first—and the most common—is the conventional mortgage loan. A borrower can have up to 10 financed properties. This includes any primary, secondary or investment properties which have been purchased with borrowed funds.
In order to qualify for a conventional mortgage loan for investment properties, homebuyers need to meet the following eligibility requirements:
- Minimum 15% down payment on single-family homes
- Minimum down payment of 25% for two- to four-unit properties
Conventional mortgages also require a credit score of at least 620.
There are also options for investment loans through portfolio lenders, although these loans are not sold to Fannie Mae or Freddie Mac (federally backed home mortgage companies).
Hard Money Loans and DSCR Loans
Both hard money loans and DSCR loans are secured by collateral property whose value determines the loan’s provisions. These loans are a common choice for professional investors and flippers.
Hard money loans generally come from an individual or a company, while DSCR loans—Debt Service Coverage Ratio loans—can be obtained from a reputable mortgage banker such as Compass Mortgage or a similar financial institution.
Because these types of loans rely more on the property’s value and its potential for generating income than the creditworthiness of the borrower, the approval process may turn out to be more streamlined.
An advantage of these loans could be the possibility of a lower credit score requirement for the borrower, for instance. On the other hand, a distinct disadvantage for hard money loans is that the cost of such a loan—in particular, the interest rate for the loan—is almost always notably higher than a traditional mortgage. What’s more, the various fees and closing costs often end up costing more. (DSCR loans, however, generally have more favorable terms overall.)
Private Money Lenders
Private money lenders are those people who have enough of their own money to help you with your real estate investments. You could get this money from friends, family, coworkers or some other individual.
Getting a loan from a private lender usually comes with fewer terms and conditions. You may also get a lower interest rate and a more flexible loan term.
However, you should make sure that you and the lender have an appropriate contract drawn up. You don’t want to risk your personal relationship for the sake of a loan.
Home Equity Loans
A home equity loan uses your personal home as collateral against the investment loan. These loans come in a lump sum so you can use the money any way that you want, including for investment property.
However in most cases, you can only borrow up to 80% of your personal property’s value, though there are exceptions. This may not be an option if the investment home is much more expensive than your personal home.
Get the Right Investment Loan for You
While it is true that investment property loans require a larger down payment when compared to a traditional mortgage loan for a primary residence, they still can be a viable option. You have to do some planning and make sure that you’re financially prepared.
When you’re ready to get started, look no further than Compass Mortgage. Check out our investment property loans guide and get started on your real estate investment dream today.
