Real estate is a great way to make passive money and build wealth. However, you will need some form of real estate financing to launch your real estate career. Financing is usually one of the biggest challenges for beginners in real estate. Not everyone has rich parents who will lend them money and not everyone earns a lot of money, enough to buy an investment property in cash. However, anyone can get started in real estate investing with or without a lot of cash. If you are a beginner real estate investor, a lack of cash should not hold you back. So, how can you get money to get started? Well, you have the option of taking out an investment loan. Sometimes, this may be the only way to seal a real estate deal.
There are many forms of investment property loans and investment property lenders will have different criteria that you’ll need to meet. The type of investment loan you choose will influence your success as a beginner real estate investor. Thus, you need to make sure you select an investment loan that works for beginners. Before you approach investment property lenders, it’s important to have a good understanding of the options available and how they work.
Here are 6 investment loans for real estate beginners that you should consider:
1. Conventional Mortgage for Investment Property
Of all the rental property loans, conventional mortgages are the most common. These are loans that mortgage brokers or banks offer to real estate investors. They follow guidelines set by Fannie Mae or Freddie Mac and are not backed by the federal government.
One advantage of these loans is their lower interest rates. However, they usually have strict guidelines that must be met for one to qualify. You will be required to have a certain percentage of the investment property’s purchase price as down payment, a good credit score and credit history, and other terms, depending on your location and specific lender. These requirements will determine whether you will get approved for the loan and the mortgage rates applied. As a result, some beginner investors who aren’t able to meet these requirements may not qualify for a mortgage loan for investment property or they’ll end up with higher interest rates.
Conventional mortgages are typically used for the buy-and-hold investment strategy and not for short-term financing. The fact that the mortgage payments are done monthly, however, makes them easier to budget for.
2. Hard Money Loans
Hard money loans are short-term investment loans from professional individuals or companies. Unlike conventional mortgages that can take up to 60 days to secure, hard money loans can be secured much faster. If you need to close quickly, then you should consider them. Moreover, your credit score does not determine if you qualify for the loan. Hard money lenders usually assess the value of the property you want to acquire to determine whether to give you the loan.
The major drawback of these investment property loans is their high interest rates, which can be up to 10 percent higher than conventional mortgages. They are good investment loans for first-time investors who want to use the fix-and-flip strategy. It would be unsustainable to get this loan for a long-term rental property. So make sure you evaluate the profitability of your target investment property before you consider taking these investment loans.
3. Private Money Loans
You can also get a loan for investment property from non-professional individuals. People with extra money may lend it at a specific interest rate to get a good return on investment for their money. Private money lenders may be people from your personal network like friends, family, co-workers, neighbors, or other property investors. Due to the close relationship between the lender and the real estate investor, these investment loans typically have fewer formalities and more flexible structures. The investment home loan rates are usually lower. If you have been turned down by banks, you should consider a private money loan.
Related: A Guide to Private Money Lenders for Real Estate
4. Home Equity Loan on Investment Property
Another investment loan for a first-time real estate investor to consider is a home equity loan. If you own a home already, you can borrow from a bank or other financial institutions against the equity of your home to acquire an investment property. The investment loan you qualify for will be based on the difference between your equity and the current market value of the investment property. An investor can typically borrow up to 80 percent of the value of their home equity. Interest paid on home equity loans is usually tax-deductible.
The disadvantage of these investment property loans is that, if you can’t keep up with the monthly payments, you risk facing foreclosures. It would be wise to weigh the risk first before taking it. You should have a steady and reliable source of income so that you can be able to pay off the loan. You can use an Airbnb calculator to determine the future profitability of your short term rental property.
5. FHA Loan for Investment Property
If you are a beginner real estate investor, you can also consider an FHA loan for investment property. This is a mortgage loan that is insured by the Federal Housing Administration. This investment loan would be a good option if you want a house that will be both a permanent residence and an income property. FHA loans are meant for primary residences and not for investment properties. However, you can use an FHA loan as a loan for investment property if you buy a multifamily property, live in one unit, and rent out the rest.
This investment strategy is very profitable in Huntington, West Virginia. For the complete list of the best real estate investment locations, read: Wondering How to Live Rent Free? House Hack in These 7 Cities.
For beginners, this can be a cost-effective investment loan. An FHA loan usually requires a lower down payment than a conventional mortgage. The down payment is usually a minimum of 3.5%. There’s also no need for good credit. This makes it an excellent real estate investment financing method for young and beginner investors.
Related: Can You Use FHA Loan for Investment Property Financing?
6. VA Loan for Investment Property
A VA loan is another government-backed loan that you can use as an investment loan. However, unlike FHA mortgages, VA loans require no down payments. Just like FHA loans, they cannot be used to acquire property solely for real estate investing purposes. The alternative is to purchase a multifamily house, occupy one unit, and rent out the other units.
Related: Financing a Multifamily Property: A Beginner Investor’s Guide
The Bottom Line
There are many loans for real estate investing to choose from. However, as a beginner real estate investor, understanding how to get the best loan for investment property is just as important as finding a good investment property. The best investment loan for you will depend on your personal financial status, your investment goals, and the type of investment property you intend to buy. Do your research to make sure that you meet the investment property loan requirements. You should also compare the investment property mortgage rates.