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Investing in property is an art, seldom mastered by only a few. Managing a successful rental portfolio is not as easy as its seems on the surface. Sometimes, investments backfire and you have to quickly get rid of them to save your entire portfolio. People can go under sooner than they think and often end up in a lifetime of debt. As gloomy as it may sound, if done correctly, there is nothing more rewarding than real estate investing.
What is an Investment Property Loan?
Investment properties, as the name suggests, are meant to capitalize on the gains in an appreciating real estate. Over a course of time, which can be months or decades depending on the investor, these properties are pegged to deliver a certain appreciative value. Apart from the lump sum gain in the price, these properties can also generate monthly cash via rentals.
Most investment properties are purchased using investment property loans and not outright cash. People use loans for both refinancing or purchasing a home, shopping mall, condo or multi family home. These loans can also be utilized for raw land development, spec building or new construction. Primarily, there are two kinds of loans, namely:
- Commercial
- Residential
Let's study both these types in detail.
Residential Property Investment Loans
Investment loans for residential properties are geared towards single family homes, multi-family homes, condominiums and apartments. These are, in essence, comparable to simple home mortgages. Here are some qualifying criteria for such loans.
- Debt to Income: Lenders use it to calculate how much you earn and how much mortgage you can afford. Debt to income is a simple measure your potential credit vulnerability and shows lenders how much risk they can take while dealing with your mortgage application.
- Credit Score:This is a vital number that lenders use to know more about your credit history. It is measured between 300 to 850. if you need a good investment property loan, try to maintain a score between 680 to 730.
- Loan to Value: Investors like to know the risk involved with an investment property. The loan to value figure represents loan amount in comparison to the current fair market value of the property. Presently, lenders give about 60-75% of the property's value as loan.
- Experience as landlord: This is not an obligation but a prior history as a landlord can work in your favor. Successful property investors with a large portfolio have to maintain a good track record otherwise their debt to income ratio will increase. This can affect their cash flow. Banks help an experienced investor by adding the monthly rentals to the income thereby aid in maintaining their credentials.
Residential investment property loans have a time period of 30 years. Interest rates are usually around 1 percent higher that traditional mortgages.
Commercial Property Investment Loans
Properties having more than five units come under the purview of commercial loans. These loans cover a wide range of properties such as office complex, multi-family apartment buildings, shopping malls, shops and more. These mortgages are harder to secure, have faster balloon payments, higher interest rates and stringent regulations.
The qualifying criteria are similar to residential mortgages such as debt-to-income ratio, credit score, loan to value and landlord experience. But there's another term attached here i.e. debt to service coverage ratio. DSCR helps lenders evaluate the potential of a property to generate sufficient cash flow.
DSCR = Total Income / Payment on Debts
Private LendersPrivate lenders are known to give hard money loans as per the equity in the proposed investment property unlike banks who consider the borrower's credit strength. These loans are ideal for house flipping where ugly homes are renovated and then sold. Also, buy-and-hold investments derived from refinanced houses is another target area for these loans.
Hard money loans are available in all the 50 states. The interest rates depend on the lender but usually fluctuate in the range offered by conventional lenders. Private lenders can be anyone with an extra cash to invest in your venture. The rules are vague and interest rates vary on your goodwill with the lender. Seasoned property investors have a network of trusted private money lenders who take precedence over banks and also promise better returns. Private money lenders for rental investor loans are a great option if your deal has a suitable equity potential and you command a good track record.
A lien can be imposed in the lending terms that signifies that lender can undertake foreclosure in case of non-payment of dues. Such loans also do not reflect in credit reports and are terms as 'non-recourse'.
Credit UnionsProperty investors can turn to credit unions to enjoy some flexible lending terms. However, the qualifying criteria are usually similar to the banks. The number of loans an investor can undertake is somewhat restricted and dependent on the union.
Portfolio LendersPortfolio lenders use their own money and thus are not always tied to bigger banks. Their lending abilities are not restricted as compared to the banks but they are still regulated. Portfolio loans are suited for well-off investors with a successful track record.
Mortgage BrokerMortgage brokers are a helpful bunch. Their large network can come handy in searching for the right investment property loan that suits your requirements. Calculate the commission of the broker in the final loan charges.
Every investment property loan is unique. Successful portfolio managers improvise with the times and ensure their success.