Real estate investing is a viable business that can generate income with a relatively small initial investment. The income can be either monthly income from rent, or income from significant capital gains, when a property is sold at a large profit.
Examples for investment properties include – rental houses or apartments that are rented to tenants to provide a regular cash flow; rental of vacation houses, that are often rented for a short period for a higher rent, sometimes in a seasonal manner; rental of commercial properties, for example offices, area for a gym a business or a factory provide monthly regular income; or properties that are purchased for a low price, fixed and sold for a significant profit.
Purchasing a property with a loan will allow you to start investing faster, if you don’t have the entire purchase price for the property. Additionally, it will allow you to leverage your smaller initial investment, increasing your percentage profits for your actual invested money.
Obtaining a loan from a financial institution
Loans for investment properties are more difficult to obtain than a mortgage for a primary residence. Some banks or loan brokers, however, will finance investment properties with commercial loans. The terms of the loan will often differ from the terms for a residential mortgage. Below, I’d refer to loans from commercial financial institutions as conventional loans.
The approval of conventional loan is normally determined by the following -
- Credit score, regular income and other assets of the borrower. These determine the ability of the borrower to pay the loan.
- The value and condition of the property that will use as collateral to secure the loan. This would most probably determine the amount of the loan you can secure.
Currently, smaller local banks tend to lend more than the larger banks to investor. Shopping for a loan will have you find the loan with the best terms available, as loans from different institutions differ greatly. It will also help you to find the few institutions that do lend money for investing in real estate.
Alternative financing options
- Line of credit from another property or a principal residence.
- Purchasing on land contract with seller finance, may be a viable option, if you can rent the property with a positive cash flow, or sell it for a profit.
- Obtaining a police loan on your life insurance is a great way to get money fast. Normally the annual interest rate is about 6%, and the only thing that would determine how much you can borrow, is the cash value of the policy. Normally, you’d get some of the interest back into your policy as dividends, so the net interest rate for this loan is actually very low.
- Using private lenders for a short term. Private lenders normally approve loans in a significantly shorter period than the bank, and look more at the value of the property than the credit score of the borrower. The interest rate is normally higher than that of a conventional loan and the loan is only for a short period of a few months up to a couple of years.
- Living in the property for 2 to 3 years before making it an investment property may allow you to get a loan for a primary residence, and still satisfy the conditions of the loan before you start renting it for a positive cash flow.