Since real estate investments offer a ton of benefits compared to volatile stocks, more people are interested in learning more about them. It is an excellent way to protect yourself from the risks of some other forms of investment.

Whether you intend to keep your property for a short or long time, you can generate income by flipping it or converting it into a rental space. Diversifying your investments is an excellent strategy to manage the risks that investments can bring.

When investing in properties, one of the major factors to consider is the huge capital layout compared to investing in stocks. Before deciding on your investments, take time to do your research. Seek out opportunities for better deals and check your options to finance your property purchase.

Investors will have access to many different financing options, and you’ll need to know the requirements of each lender. It will also be useful to assess each loan type so you can decide what type of financing is suitable for your needs.

Here are different kinds of loans and how they work:

Conventional Bank Loans

Typically, residential homeowners are already well-versed in conventional financing where a down payment of 20% of the total home price is expected. However, when it comes to investment properties, most lenders may ask for a 30% down payment.

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Your credit score and credit history are likely to come into play and are a huge factor for approval, including the interest rate that will be offered. The borrower must be able to present proof that they can pay for the monthly loan of the real estate investment.

Hard Money Loans

Another option for a short-term loan that fits investors who plan to flip properties is a hard money loan. If your investment plan does not include flipping properties, however, you will likely benefit from seeking out other loan options.

Hard money loans are easier to access than conventional loans, as you won’t need to submit a lot of paperwork. Lenders may still weigh a borrower’s credit history and current income, but they are likely to focus more on how profitable a property is.

However, there are disadvantages when choosing a hard money loan to support your fix-and-flip investment strategy. You are likely to earn very high interest and will be required to pay in a shorter time frame. Loan-associated fees tend to also be high and borrowers are commonly expected to pay back in less than a year.

Home Equity

Investors can also finance their property investments by applying for home equity, a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Up to 80% of the home’s equity value is often available for you to buy and improve your chosen property.

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This type of financing has pros and cons, which depend on the specific loan you pick. For example, a HELOC permits investors to borrow against the equity and only pay the interest each month. However, the rate can vary and be impacted by the change in prime rates.

Private Money Loans

Financing coming from an individual is termed a private money loan– if your friends or family offer to lend you money, for example. You can also find private money lenders when you connect with a real estate investment network who are often attending property-related events.

There are no fixed rules on private money loans. Some will allow longer terms and set low-interest rates, while others won’t. This is dependent on your relationship with the lender. Security for the loan will often be through a signed agreement that permits lenders to foreclose the property if you don’t meet the payments.

What Are the Investment Property Financing Requirements?

Requirements can vary per lender and lending option. A private lender may consider your relationship with them, while hard money lenders may assess the real estate market and evaluate the estimated after-repair value (ARV).

Compared to both, most other loan financing options, such as home equity loans, home equity lines of credit, and conventional loans will require stringent criteria to approve an investor’s application. The primary factors will often be how much income you are earning and your credit score.

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What Are Excellent Tips When Applying For Financing?

Ensure You Make A Huge Down Payment

Generally, a 20% down payment is required to secure financing, but if you manage to make it 25%, you can access better interest rates. This will reduce the risk for lenders, thus incentivizing them to offer better rates and terms.

Maintain A Good Credit Score

Most lenders will evaluate your credit score, so it is important to be a good borrower who pays loans on time. Remember that the lower your credit score, the higher the interest rate you will have to pay.

Some lenders may also require you to have available funds that are sufficient to cover a six-month worth of expenses before approving your financing application.

Connect With A Local Bank Or Broker

Since down payments can be hefty, you can opt to apply for financing at your local bank rather than at a large financial provider. Local banks provide more flexibility and will often have expertise in the local market.

Alternatively, you can consider mortgage brokers, as they often have access to more financing solutions, but make sure to conduct proper research before finalizing your decision. Review the background and professional experience of the broker.

Request For Owner Financing

It is now widely acceptable to ask for owner financing considering that qualifying for credit is stricter and borrower standards have increased. Taking this path informs the seller that you are serious about completing the transaction.

Bottom Line

Real estate investment, just like any other form of investment, presents its own risks, so you need to do a thorough study first when choosing which financing is best for you. Outline the pros and cons of each financing option and consider the short-term and long-term consequences to ensure you maximize your property investment.

If you need any help managing your investment property, contact Stringer Management!