5 Types of Investment Loans for Real Estate Property

81 Views
Loans

Anytime we talk about investments, the property comes at the top of the discussion almost always, and for good reasons. While properties might take a bit longer than some other investments to start making a good deal of profit, you can almost always guarantee some amount of profit in this area. Moreover, no matter what kind of economic crisis hits the world, even if the real estate market crashes, it picks up its pace much faster than other investments. However, even though it is the most common investment instrument people use, most of them cannot afford a property with a potential of high return without an investment loan. Here in this article, we have talked about various investment loans, how they work, and all whys and wherefores of them so that you can pick the best investment property loan for yourself.

What is an investment loan

Investment loan for real estate property is the type of loan you take when you wish to buy a property separate from your primary home and use it as an investment. This property can be residential or commercial – like you wish. Most commonly, people take investment loans for fix-and-flip properties where they purchase houses, renovate them, and then either resell them or rent them out. This is also why lenders typically provide investment loans for shorter period. In case you are in it for the long haul, as in, you want to rent the property out, in Australia, you get the option of refinancing your property after or within this short period, where you can begin a conventional long-term mortgage with a more favourable interest rate.

5 best investment loans for property

There are quite a few types of investment loans available in Australia. Based on their convenience and return of investment, we have listed five best investment loans for property below:

  • Mortgage loans:

This is the most common form of property loan out there, for a primary property or an investment one. This kinds of conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies; and are not secured or offered by government institutions. These loans have fixed rates of interests which do not change in the lifetime of the loan.

  • Who will qualify:

The details of a conventional mortgage investment loan varies among states, however, some basic requirements remain the same.

      • You will need to submit the necessary documents such as proof of income, bank statements and investment account statements, gift letters in case you receive help for your down payment, a valid identification, your social security number, and your signed permission for viewing your credit report.
      • The lender will also verify your full employer history, the current as well as the previous employers.
      • You will need to get your documents notarised.
      • Your mortgage payments for this property should not exceed 28% of your gross income.
      • You must be able to afford the monthly payments of your existing property, if there be any.
      • Usually, property investors ask for 20% of the purchase price of the property as a down payment.
      • A credit score of at least 680 and, preferably, well over 700 may be required for this type of loan.
      • Your debt-to-payment ratio should be around 36% and no more than 43%. 
  • Whom this is suitable for:

If you are one with a steady job with a fixed income each month, and of course, fulfil all the above requirements, this type of mortgage might be the best investment property loan for you because of its low risk and various possible tax benefits.

  • Hard money loans:

Hard money loans are usually provided by individual lenders or companies rather than banks. These are often called bridge loans since they are given for a short period. Although these are secured much faster than the other long-lasting loans, the repayments for them are higher – up to 10% higher than conventional mortgages.

  • Who will qualify:
  • Hard money lenders typically don’t judge you by your credit-worthiness, but rather by the value of the property that you are investing in. 
  • The terms of these loans are also much more flexible since you can negotiate with the lender.
  • You might be asked to use collaterals apart from the investment property itself, like personal assets or other properties that you own to mitigate the risk of the lender.
  • Whom this is suitable for:
  • If you are planning to renovate your property and sell it soon after, this type of investment property loan will suit you pretty well.
  • This type of loan is risky yet convenient. Smart guideline is, you should go for it only if you are a wealthy investor who needs to get quick funding for an investment property, while avoiding the red tapes of bank financing.
  • Home equity loans:

Essentially, home equity loans are a second mortgage against your already existing home. The loan is based on the difference between your existing equity on the property you own and its current market value. You can use your home equity completely to make the down payment for the second property, or you can borrow against the equity. Either way, you get the option to borrow as little or as high from this amount, 80% of your equity is the credit limit, and the interest is only charged on the amount you end up borrowing. 

  • Who will qualify:

Your lender will run a credit check and appraisal on your home to decide how much more credit you will be allowed.

  • Whom this is suitable for:

This kind of loan is one of the best investment property loans for responsible property investors who bought a house which increased in value by the time they decided to invest in another property. This type of investment property loan has a higher interest rate than the first mortgage on the house. What is more, the interest paid on home equity loans is even tax-deductible.

  • Private money loans:

Private money loans are very similar to hard money loans, except they come from not so professional lenders. These can be other real estate property investors, or even your family members, friends, neighbours, co-workers – practically anyone who has some extra bank balance and wants to receive a good return on investment.

  • Who will qualify:

Virtually anyone with a connection with someone willing to invest their extra bank balance is eligible for this type of loan. 

  • The terms are negotiable as your lender is known to you, and interest rates are typically lower than the other options.
  • However, these loans are secured by a promissory note and/or the existing mortgage on your income property. 
  • Whom this is suitable for:

Since this type of loan requires no strict conditions like credit score or debt-to-payment ratio to be met, these are the best investment loans for a property when you are just starting out in the field of real estate investment, or your credit score is low.

  • Purchase-money loans:

Purchase-money loans or owner financing loans are provided to the buyer of the property by the original owner, and now the seller of the property. In this case, the borrower makes a down payment to the seller and gives a financing instrument as evidence for the loan. The security instrument is typically registered in public records, in order to protect both the parties from future disputes. After the lease-purchase agreement is fulfilled, the buyer receives the title and credit for part or all of the rental payments toward the purchase price and then obtains a loan for paying the seller.

  • Who will qualify:

In this type of loan, every term, including the rate of interest, monthly payment amount, as well as loan terms, is negotiable between the buyer and the seller. In case the seller has equity on the property, the buyer pays him/her for the same on an instalment basis.

  • Whom this is suitable for:

This kind of loan is most commonly opted by people who don’t qualify for most other loans and also seasoned real estate property investors who are knowledgable about every ins and outs of loans. 

Conclusion

An investment like real estate property can be highly profitable if you play it smart. Research thoroughly about the real estate market, the investment property that you are eying, the various types of investment loans, and your eligibilities to pick the best investment loan for property for yourself and stick to it. In case of any doubt, never be shy to consult a professional and take expert guidance. It is a sure thing that you will make profits.

TAGS , , ,

    Related Articles