Investing in property is an outstanding way to build a strong, profit-making portfolio. While there can be higher levels of risk and (in most cases) a lot more work involved, investment properties can bring a steady income, often outpacing traditional investments like stocks and mutual fund accounts.
But far more people own typical investment accounts than commercial and residential property.
Why is that?
Probably the biggest reasons is that investment property is expensive. Even moderately-priced investment properties cost around $100,000, and commercial or rental properties can cost go into the multimillions. For this reason, some people overlook investment properties, but there is a solution: loans for investment properties.
If you are seeking an investment-property loan, you might think your choices are limited. But in truth there are many options.
Finding the right financing for your needs is important, so let’s learn about the top loans for investment properties…
7 Types of Loans for Investment Properties
Conventional loans are possibly the most common type of loan used throughout the real estate industry. It’s also a common way for investors to finance their properties. These loans conform to the guidelines set by Fannie Mae or Freddie Mac, but there are different qualifications for investment properties compared to owner-occupied homes.
If you are using a conventional loan, you will likely need 20% down. This is a large sum, but requiring this payment reduces the chances of a default on the loan. It also ensures that more investors are coming from strong financial footing before purchasing an investment property.
Many factors will be at play when you apply for a conventional loan on an investment property, including your credit score, income, and debt load. These factors will impact the interest you pay on the loan, so the better your credit, the lower your rate.
Cash-Out Refinancing on Personal Home
Cash-out refinancing is generally used for purchasing appliances, making home repairs, or remodeling a certain room in the home; kitchens and bathrooms in particular. But one use for refinancing that doesn’t get discussed enough is investment properties.
Cash-out refinancing is simply a way to convert the equity you already have in your home and turning it into usable cash. You get a loan and use your home as collateral; usually you need at about 20% equity to use this option, but the more you have in equity the more you will be able to borrow.
If you have a significant level of equity, this could be a useful option. Because you are purchasing an entire property, you will likely need 80% equity or higher, depending on the value of your home and the price for your investment property.
The FHA is largely concerned with supporting owner-occupied homeownership. Their overarching goal is to help Americans purchase homes where they will live for years; it’s not to help investors build a portfolio. However, you can use FHA loans to purchase an investment property, and it’s not at all a loophole or a trick.
The FHA supports loans for single-family homes, but you have to live in the property for a certain period, usually about two years. Once that period is over, you can move out and use the property as a rental home. This allows for convenient access to financing, while also creating long-term opportunities for investment properties.
There is another way to use FHA loans to purchase a property that earns an income right away. You can purchase a multiunit property, such as a duplex, and rent out units right away. Like before, you’ll have to live on the property for a certain period. So if you purchase a four-unit property, you could live in one unit and rent out the other three. And, also like before, after a certain time passes, you can move out and place the entire property under rental.
With all property loans, you’ll have to verify your income during the application. Except for one option: the no-income loan. It’s possible to purchase an income property and, instead of using your income during the application, you simply use the income you will generate from the rental property.
To use this option, you need to have a market survey completed on the home. Essentially, this is a basic analysis, conducted by a trained professional, to determine how much you will be able to earn off the property. Using this information, the lending agent can then determine whether the rental income (and the rental income alone) is enough for qualification.
Bank statements can provide a wealth of information to lenders. In many ways, they are more reliable than paystubs and other forms of financial information, as they not only show how much you earn, but how much you have in savings and how much you tend to spend on a monthly basis. This can give lending agents a clear understanding of your financial foothold.
To use a bank-statement loan for an investment property, you will need to bring as much data as possible. While it may be possible to get approval with as little as a month of information, two years (or more) would be far more ideal.
Residential property is not the only type of investment property. Commercial property is also a good choice, although it can have even more risk, and an even higher price, than residential homes. To get a loan for commercial property that you will use as a rental (not as a location for your company, but renting it out to other businesses) you will need a variety of information, just like a typical loan. The final result, however, is a loan that can provide your investment portfolio with a commercial property that can earn significant returns.
Clear, Honest Advice for Investment Property Loans
Want to learn more about loans for investment properties? Contact our staff today and we’ll make sure you get the right information. From jumbo loans for commercial properties to government-supported financing for a moderate starter home, we are here to make it happen for you!
“I wanted to reach out and tell you both Thank You for working so hard on my loan. I really appreciate how much effort you both put in to make it happen! Top notch, one of the best I have ever seen in the business.”
I was referred to Chad by my Realtor for a purchase of a new house. The experience with Chad and the team (I mainly worked with Juliann) was nothing short of outstanding. From start to finish there were always quick to respond and when needed, notify me of any new documentation that was required. There were very helpful explaining to me the pros and cons of different financing options as well as some other loan related issues, such as termite clearance outside the purchase contact and septic tank certification process. Overall, very knowledgeable and processional team. Loan preapproval was done in a single day and loan documents were ready for signing in 21 days, which was 9 days ahead of schedule. That never happened to me before.
“Chad and his team are exactly who you want handling the financing of your home. Whether it be a new purchase or refinance, he and his team are one of the most professional, responsive group of people I’ve worked with. Buying a home can be very stressful and Chad and his team took all of the necessary steps to make the process as painless and as quick as possible. They are extremely knowledgeable, organized and have great follow through. You won’t ever be left wondering what the next steps are. I highly recommend him and will use him in all of our real estate transactions moving forward.”