A Guide to Investment Property Financing: 3 Types of Loans

Roshni Khatri

27th Jul'22
A Guide to Investment Property Financing: 3 Types of Loans | OpenGrowth

90% of millionaires got their wealth by investing in real estate.” Andrew Carnegie: the billionaire of the American steel industry.

Real estate investing is the most practical approach for you to create wealth in the future. So if you are also planning to invest in real estate and purchase the property to make a profit out of it or planning to rent it or resell then you must have the catalysts in mind to lead the game. With this you should also know about emergency funds as they can help you in creating wealth.

Moreover, real estate financing provides numerous benefits to investors such as home appreciation, cash flow and other tax benefits. Thus it is the robust investment option that dominates the preferences of investors. However, while dealing with real estate investments, you should adopt a strategic mindset. Well, in this article we will discuss the top kinds of investment property financing. Let's look at some of the greatest options for financing real estate together!

 

Real Estate Investment Financing

 

Real Estate Financing

Property investments financing describes the financial methods which are used by investors for securing their independent capital investments. It is about a long-term financial method to secure the capital at the time of buying it and obtaining funds from outside sources. In other words, it is a process of borrowing and lending the money for those who lend the loan and for those who acquire it. Consequently, the real estate finance procedure involves two parties.

Property investments are about the transactional sale or acquisition of property to generate income through rent, tax benefits or a profitable resale. We all know that the investment properties are not a primary residence or second home for the owner. To finance the investment property, you need a loan from a mortgage lender or bank.

Thus real estate investments are risky, having a volatile market, higher rate of interest and large down payment percentage than a residential mortgage. Besides this, the lenders have different terms for loan programs relying upon the borrower's income and credit score. So for securing a safer financing option proper research is required.

 

Types of Property Investments Financing

As far as real estate property investments are considered these are financed through two prime modes: cash or investment loan. However, for the vast majority of people, investment loans are the premier source of property financing. We'll talk about some popular forms of funding for real estate investments, Have a look:

Conventional Loan

A conventional loan is the most accessible source of property investment financing. These investment loans follow the guidelines prescribed by Freddie Mac. The requirements and needs of conventional loans may vary from state to state and location. However, there are a lot of features that apply to all situations. This includes a down payment that is 20% of the first investment property. 

This credit score of 620 is the minimum for the loan, and 740 to have good investment property mortgages and six months’ worth of mortgage payments in a bank account. Thus the conventional loan mechanism is the best suitable for both the experienced and beginner in this field.

 

Real Estate Investment Financing

 

Hard Money Loans

The investor has to deal with the typical duration aspect of conventional loans. As conventional loans last for many years with the same fixed rates ranging from 15 to 30 years. So some investors want to avail of the loan for an investment property that is shorter in duration. The choices for hard money loans are preferable for these investors. These kinds of loans are short-term and are a maximum of 36 months. 

Besides this, the interesting fact is that the hard money investors do not require the credit score of the borrowers. But given that hard money loans typically have interest rates that are more than 10% higher as compared to normal mortgages.

Home Equity Loans

The home equity loan is the best financing method for property investors with existing home equity from another property. As the name suggests, it is the loan that is availed against the equity of a home or other private property to arrange the funds for purchasing another property. The prime advantage of home equity investment loans is that they can finance up to 80% of the value of home equity. 

Besides this, home equity loans are beneficial for experienced property investors. However, like hard money loans, home equity loans also come with higher mortgage rates.  

 

Real Estate Investment Financing

 

Essentials to Get Approval for Investment Property Financing

There are different requirements for every lender and type of financing. As far as private lenders are considered they just need a relationship with the borrower. With this, the hard money lenders require the hot real estate market and a good estimated after-repair value. Well, the fact is that you need a proper credit score and income status for availing of the loan through home equity and conventional loan lenders. 

All investments come with risks similar to real estate investments too, as they may have the risk of depreciation of assets, financial losses, legal formalities, and many more. But it is a rule of investments that higher revenues come with higher risks. 

Thus you are not supposed to get bothered about the risk factors as they are usual and take place with every investment, so you just have to focus on the investment strategies and lead it with successful investing mechanisms. With this, by addressing the personal finance podcast, you make finance management simple.

 

Conclusion

Investing in property or real estate is risky but at the same time, they offer a big payoff. Finding the money to take the advantage of investment property is a great opportunity. You must go with this if you know where to look. For this, you can compare the different borrowing mechanisms whether it is short-term or long term and also look at how they can affect your investment potential.

 

We at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. Do share them in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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