Learn the ins and outs of real estate investment loans, how to find them, and determine which financing methods to undertake!
So, you want to become a real estate investor? You did your homework to obtain all the necessary knowledge, you found the best investment property to start out, and you determined which investment strategy you’re going to follow. Now, you must be thinking “How am I going to finance the investment property?”
Truth be told, if real estate investors don’t have access to capital to purchase investment properties, then all the market knowledge and opportunities won’t mean a thing. This is why learning the ins and outs of real estate investment loans, how to find them, and determine which financing methods to undertake are is of the most important tasks real estate investors (even those with a financial background) have to perform.
As you already know, there are plenty of financing methods for real estate investors to fund their investment properties. It can be challenging for a new property investor to comprehend the process of finding and acquiring real estate investment loans – this is definitely not something you can do overnight!
That being said, in this guide, we’re going to focus on three common methods of finding the best real estate investment loans and securing the investment property. However, before diving into this, real estate investors must keep in mind that nothing comes easily in real estate investing, and they should always prepare themselves by answering the following questions.
Questions to Ask Yourself Before Applying for Real Estate Investment Loans
Are You Ready to Become a Landlord?
This is the most important question to ask yourself before applying for real estate investment loans. Owning and managing a rental property is not as easy as you might think. It comes with many tasks like finding and dealing with tenants and keeping up with repairs and maintenance.
Even if you hire professional property management services, you’re still the owner of the investment property, and thus, have to stay up-to-date with its financial situation. If you’re ready to become a landlord and take on these responsibilities, then go ahead and apply for real estate investment loans.
What Type of Investment Property Do You Want to Invest in?
In real estate investing, you have a wide choice of property types to choose from. You can invest in single-family homes, multi-family homes, condos, apartments, etc. Logically, a property investor can’t just apply for real estate investment loans if he/she has not figured out what type of rental property he/she wants to purchase as an investment.
Is the Rental Property Profitable?
The investment property you choose should obviously be a profitable one. After all, the main goal of a property investor is to make money in real estate investing. You don’t want to go through the hassle of finding real estate investment loans only to find out that the investment property is not generating profit!
Related: What’s Stopping You from Making Money in Real Estate
The easiest way to determine whether or not a rental property is profitable is by using a rental property calculator! One of the best calculators available for real estate investor is Mashvisor’s rental property calculator. Not only does this online real estate investing tool help you decide whether a certain rental property is worth your while, but it also allows you to compare between different investment properties within the same or different locations.
Thus, this real estate investing tool saves you the time and effort needed to conduct a real estate market analysis as well as investment property analysis, and gives you accurate estimates of the return on investment before you actually purchase it!
Click here to start analyzing investment properties in any state, city, and neighborhood in the United Stated to find the best and most profitable one!
What Investment Strategy Do You Want to Follow?
Before you start looking for real estate investment loans, it’s important that you determine whether you’re in the real estate investing business for the long term or the short term. Long-term investment properties require different financing methods than short-term ones (as you’ll notice below). Moreover, the investment strategy makes a difference for real estate lenders; some would only lend to a property investor for the long term as they guarantee a steady income to pay off the loan. So, make sure you understand the difference between long-term and short-term investment strategies and pick the right one.
Related: Real Estate Investing 101: Top Real Estate Investment Strategies
3 Types of Real Estate Investment Loans
Real Estate Investment Loans – Conventional Mortgages
Conventional mortgages are real estate investment loans that come from private financial institutions (e.g. banks, credit unions, etc.), the Federal Government National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). These loans attract real estate investors due to the accessibility, affordability, and reputation of these lenders. These real estate investment loans are right for you if:
- You’re borrowing as an individual (not a business entity).
- You want a lender who’s familiar with and understands your local real estate market.
- You haven’t declared bankruptcy or had a foreclosure in the past seven years.
Applying for conventional mortgages can be a tricky process and requires multiple conditions to be met. Keep in mind that every lender will have its own requirements. However, things that all lenders require generally include:
1. Down Payment
Most lenders require a 20-25% of the investment property value as a down payment. It should be mentioned that the more cash you can pay upfront, the better, as you’ll get better interest rates.
2. Credit Score and Credit History
For these real estate investment loans, a property investor needs a minimum score of 620. It’s highly advisable to establish a higher credit score before applying for conventional mortgages as this will help you get better terms, such as lower interest rates.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
3. Debt-to-Income (DTI) Ratio of 35%-50%
A lower DTI ratio will, of course, increase your chances of getting approved. Real estate investors improve their DTI ratio by increasing their income and reducing their borrowings.
4. 6 Months Worth of Cash Reserves
Banks are strict when it comes to granting real estate investment loans. They need to ensure that a property investor has enough cash to pay for the loan, which is why they require at least six months worth of mortgage payments available in your account to qualify (this amount is on top of the down payment which you pay upfront).
As a property investor, make sure you review these requirements and be prepared to increase your chances of getting approved for a loan. Bear in mind that the application process (from filing an application, through pre-approval and formal approval, to closing) generally takes at least 4 weeks, depending on your situation.
Although there are other financing methods for real estate investment loans, conventional mortgages are commonly the best option. These loans give a property investor the lowest interest rates and longest terms, which can maximize the rental property’s monthly cash flow.
Real Estate Investment Loans – Hard Money Lenders
Hard money loans are short-term real estate investment loans typically used by real estate investors who aim to buy cheap investment properties, renovate them quickly, and sell them for a profit (the fix-and-flip strategy).
Hard money loans have firmer terms compared to other types of real estate investment loans. As opposed to conventional mortgages, hard money lenders don’t look at the credit score of a borrower. Instead, hard money lenders look at the value of the investment property — specifically the after repair value (ARV) — to decide whether or not they’ll grant you the loan.
Real Estate Investment Loans: Pros of Hard Money Lending
- Faster to secure loans: Due to strict regulations, conventional mortgages can take months to be approved. Hard money lenders, on the other hand, don’t take as long to give you a decision.
- Flexibility in collaterals: The rental property is usually the collateral for real estate investment loans. However, hard money lenders can accept personal assets, like your residential property or retirement account.
- Flexible terms: One of the best things about dealing with hard money lenders is that a property investor can negotiate the loan terms.
Real Estate Investment Loans: Cons of Hard Money Lending
- Shorter repayment time: Real estate investors who borrow hard money are those who immediately need money to renovate an investment property and quickly put it in the market. As a result, these real estate investment loans have shorter repayment times compared to conventional mortgages.
- Cost: The catch with hard money lending is that it comes with higher rates (they can be up to 10% higher than conventional mortgages) in addition to higher fees.
Real Estate Investment Loans – Private Money Lenders
These real estate investment loans are sometimes used interchangeably with hard money lenders. Both financing methods don’t come from a traditional financial institution. The key difference, however, is that private money lenders are not professional lenders like hard money lenders. Instead, private money lenders are rather individuals who have extra money and want a good return on investment on their money. Private money lenders can be within your personal network (family, friends, neighbors, co-workers, etc.) or even other real estate investors and people you’ve met through real estate investing.
There is less formality with this type of real estate investment loans. Therefore, these financing methods are the best for a new property investor or a property investor who has been turned down by banks. The commitment to starting a good business and being a professional are usually important factors in these financing methods.
Real Estate Investment Loans – Conclusion
These are the three most common types of real estate investment loans. A property investor must keep in mind that some of these financing methods may not be a good fit for certain investment properties. Finding the best real estate investment loans is not that hard. You just have to do your research and answer the previously mentioned questions in order to avoid any financial obstacles in the future. There are still plenty of financing methods for you to go about funding your investment properties, and you can even invest in real estate with little or no capital at all!
Make sure to check out Mashvisor for more guides and tips for a successful real estate investing business. Moreover, don’t forget to sign up for Mashvisor to get full access to the best rental property calculator in town!