Real estate investing involves the buying, selling, renting, owning, and managing of real estate to generate long-term wealth. Because of how real estate investments work, there is a need to talk more about the importance of finance.
Finance in any organisation is as important as the people itself. It is a very crucial aspect in any business and in real estate investing, which deals with risks such as market fluctuations, property devaluation, and potential damage to properties by natural disasters.
In this article, we will be looking into real estate investment loans and their importance when investing.
Understanding Real Estate Investment Loans
Real estate investment loans are loans offered to companies and individuals to finance their long-term assets. These loans contribute to the development of their businesses which entails the purchase of land and buildings.
The major difference between an investment loan and a primary resident loan lies in how they are intended for you. A primary resident loan is for long-term use, a place where you plan on living with your family and it does not generate any income, however, an investment loan’s main goal is to generate income while having the capability of serving as a home if intended.
There are so many factors your lenders will consider before they lend you an investment loan. Some of the key factors are what is called the five C’s of Credit: Capital, Condition, CApacity, Collateral, and Character.
Types of Real Estate Investment Loans
It may be hard for you to know the best real estate investment loans to choose from. The best way to know that is to understand the risk, interest, and lending terms of each loan type. Below are the different types of real estate investment loans:
● Traditional Bank Loans
These are the most common form of real estate investment loans. A traditional term loan is financing provided by a bank that provides financing and is paid back in installments over a fixed period, usually between 1 and 25 years. They are offered a secured loan and also on an unsecured basis. There are other types of loans with traditional bank loans, one of which is conventional mortgages.
Conventional mortgages are a type of loan provided by traditional banks. As said earlier for traditional bank loans, this type of loan is not secured or insured by the federal government. It is considered a standard or traditional mortgage, usually provided by banks, mortgage companies, and credit unions. They can have fixed or variable interest rates and are usually stricter than government-backed loans because it is greatly impacted by your credit score.
Another is portfolio loans, which are a type of mortgage created by a bank or lender and is retained in the bank or lender’s portfolio instead of getting sold. This type of loan grants the lender or bank the free will to set its terms, such as interest rate and minimum credit scores. It is more flexible but is not as common as other types of loans.
● Government-Backed Loans
These are insured loans or guaranteed loans by the federal government. Government-backed loans are less riskier and are more accessible to borrowers. This allows for a reduction in the down payments, offering a lower interest rate and then providing more flexible criteria for lending compared to other types of loans. There are three types of government-backed loans:
- FHA loans (for multi-family properties).
- VA loans (for eligible investors)
- USDA Loans
● Hard Money Loans
A hard money loan is a type of loan that can be secured using real property and is usually considered a last resort. This type of loan is usually used in real estate where individual lenders or companies are involved.
One thing you should know about hard money loans is that the interest rates are usually higher than those of traditional mortgages. This gives it a very big disadvantage over the other types of conventional loan types. If you have a poor credit score but substantial equity on your property, you can try hard money loans, or you could always try other types of loans. The main advantage of a hard money loan is how fast it is compared to other loan methods. You don’t need to waste time with the loan application while verifying your income and reviewing your documents. Hence, so many things are overlooked since there is no regulation to abide by.
The disadvantage of a hard money loan is that it has a very high interest rate, and the loan term is shorter compared to other loanlenders.
● Private Money Loans
A private money loan is described as a loan that is given to an individual by a private individual or a wealthy individual known as a private money lender. They are known to offer borrowers without going through as many procedures, unlike other types of lenders. One of its disadvantages, however, is that it can be very risky for both the borrower and the lender. Because of the less regulation associated with it, the borrower has more freedom to use the loan for less ideal purposes. They can be expensive depending on what they are intended for and if the lender knows about it.
● Commercial Real Estate Loans
This type of loan is considered best for multi-unit and commercial property investments. Commercial real estate loans are designed to provide you with the financial assistance you need as quickly as you need it to buy or develop real estate. Depending on your situation, some of the products may be more suitable for you than the rest as they relate to a variety of financial products. They take on large project financing and usually have lower interest rates compared to uninsured loans. With commercial real estate loans, you can finance bigger properties while still being offered more stability. The disadvantage of this kind of loan is that if you do not pay when required, they can repossess your property, and the interest rates can be high.
● Home Equity Loans and HELOCs
Home equity loans & HELOCs are a great way to tap into a portion of your home that belongs only to you. Their pros and cons may differ slightly, but they offer you ways to borrow against your house.
Home equity loans are considered installment loans, which implies that you are given a sum of money upfront guaranteed that you make equal monthly repayments at a fixed interest for the duration of the loan. The loan term may vary, but they are usually from five to thirty years. You can get an equity loan if you want to renovate your house, consolidate a debt, or fund a major life event.
HELOCs (Home Equity Lines of Credit) are a type of revolving credit that allows you to borrow funds up to a certain credit limit as needed. You can withdraw money, repay, and then draw again while paying interest on what you borrow each time. The interest rate on HELOCs is known to fluctuate, making your total interest and amount of repayment unpredictable.
● Seller Financing and Lease Options
Compared to other forms of lenders, like traditional lenders, seller financing could be an alternative.
Seller financing, also known as owner financing, is when the owner of the property is not just a seller but acts also as the lender while eliminating the purpose of a financial institution. In this type of financing, the buyer signs a promissory note with the seller and also agrees to repay the purchase amount with interest after an agreement is made. It can provide flexibility that normal traditional mortgages lack. This lender could be someone that you know.
Lease options, or lease-purchase agreements, are also known as rent-to-own agreements, which allow the buyer to rent the property with an option to buy it at a preset price.
Conclusion
Real estate investment loans are arrangements made by traditional banks or individuals to help investors be able to finance their projects without the issue of low funds. These arrangements are great, but some of them come with high interest and are not suitable for everyone. If you want to choose the best real estate investment loans suitable for you, you need to do more research and understand better before making any plans.
Consult with a mortgage broker on the best plan for you while also exploring other financial options.