Real estate investing is typically financed through two main ways: cash or an investment loan. For the vast majority of real estate investors, investment loans are the primary source of property financing. How many types of investment property loans (also referred to as mortgages) are there? The answer is…there are a lot! Here are the 7 best types of investment loans for a real estate property!
Related: The Best Approach to Investment Property Financing in 2019
Conventional Loan for Investment Property
Out of all the rental property loans out there, a conventional loan for investment property is the go-to for many investors. These investment loans follow the guidelines set by Freddie Mac or Fannie Mae. The requirements for a conventional mortgage loan may vary from state to state and locale to locale. However, many aspects are consistent across the board. These include a down payment, which is 20 percent for a first investment property, a good credit score, 620 minimum for the loan and a 740 to have good investment property mortgage rates, and six months’ worth of mortgage payments in a bank account. For both experienced and novice property investors, a conventional mortgage is the golden standard for property financing.
Private Money Investment Property Loans
For some investors, conventional mortgages are not enough. What a conventional loan for property exhibits in convenience, it lacks in flexibility. As a result, a property investor may want to borrow a loan from a private individual, such as friends, family, or other real estate investors. The most defining feature of a private money mortgage loan for investment property is its flexibility. The borrower and lender are free to negotiate many of the investment property loan requirements. The investment property loan rates, duration, and much more can be agreed upon by the two parties. However, there is a considerable downside to these real estate investment loans. Typically, if the borrower does not pay off the loan on time, the investment property lenders still reserve the right to foreclose the rental property.
Hard Money Investment Property Loans
Another potential issue some real estate investors may have with a conventional mortgage is its typical duration. A conventional mortgage lasts for many years, with common fixed-rates ranging from 15 to 30 years. Some investors, however, want to get a loan for investment property that is shorter in length. For these investors, hard money loans may be the perfect solution. Hard money loans are short-term loans that are a maximum of 36 months. Hard money lenders also do not require investors to have a credit score. However, due to such leeway with hard money, there is a caveat. The caveat is that hard money loans have high rates, usually 10% higher than those of conventional mortgages.
Home Equity Loan on Investment Property
A home equity loan on investment property is an excellent financing method for property investors with existing home equity from another property. As suggested by the name, a home equity loan is when a real estate investor borrows against the equity of their home or other real estate property to fund the purchase of another property. A great advantage of home equity investment loans is that they can finance most of the property purchase by allowing the real estate investor to borrow up to 80 percent of the equity value. A home equity loan on investment property is very beneficial for experienced property investors. Unfortunately, like hard money loans, they come with high mortgage rates, which are always higher than the mortgage rate of the first property’s loan.
Related: Weighing Your Investment Options: Rely on Equity or Take Out a New Mortgage?
FHA Loan and VA Loan for Investment Property
If you are eligible for an FHA loan for investment property, then you should definitely consider it as a means to obtain a rental property. With an FHA loan, a real estate investor purchases a property using a loan funded by the FHA. These FHA loan-funded properties are owner-occupied for one year and can be used as a rental the following year. FHA financing is particularly excellent for its low down payments, which can be as low as 3 percent.
Real estate investors who are veterans are eligible for a VA loan, which follows many of the same principles and guidelines as FHA financing.
Lease With Option to Buy
Another candidate for the best loan for investment property is lease with the option to buy. Essentially, the tenant, who is also the property buyer, makes a deal with the landlord, who is the seller, to pay portions of the rent towards buying the rented property. By doing so, the tenant is extremely familiar with his/her future investment property, and the landlord finds a reliable buyer. Like private money, the terms of a lease with the option to buy can be negotiable. Thus, these investment loans can lead to low credit score requirements, a low down payment, and negotiable mortgage payments.
Purchase-Money Loans
To round up our list of loans for real estate investing, we arrive at purchase-money loans. Also known as owner financing or seller financing, this is a mortgage in which a property seller funds the purchase of his or her property. This type of loan does sound strange, to some degree, but both parties benefit from this arrangement. As is obvious, the borrower, or buyer, obtains real estate investment financing to purchase a property. The seller (and lender) receive high interest and investment home loan rates in return. Typically, only experienced real estate investors use this financing method. If you are a beginner property investor, consider using this method when the time comes to expand your portfolio.
Related: Owner Financing: Is It the Best Way to Finance an Investment Property?
After reading this informative blog, finding investment loans for property financing should not be difficult. However, as real estate investors prepare their financing method, they need to find investment properties for sale, which can be tiresome. Luckily, Mashvisor is here to help you again! To start finding the best positive cash flow investment properties for sale across the country, click here.