In a healthy housing market, investing in real estate can be a great decision if you're looking to make some extra money. Not only is it a potentially lucrative source of passive income, but it also allows you to retain ownership of a property that may appreciate in the future. However, it's wise to do your homework before investing in a property to avoid losing money. Below, we'll cover different types of loans for financing investment properties, rental properties, and second homes so that you know what to look for in a property and a financing solution.
Perhaps the most important thing to remember is that if you're looking for quick cash, an investment property might not be your best bet; it can take years to see a positive return on your investment. Plus, if you don't plan on maintaining the property yourself (experts also recommend setting aside 10–15% of the tenants' annual rent amount for upkeep), you'll also need to consider the costs of outsourcing property management, which ranges from $80–$100 on average per month . That's in addition to your down payment and interest, property taxes, insurance, and utilities if you're covering them for the tenant.
For a $100,000 rental property, for example, you may need $30,000 or more just to close on the property and make necessary repairs before renting it out. A simple and common way to evaluate a potential rental property is known as the “one percent rule.” This states that if the gross monthly rent – prior to expenses – earned from the property is equivalent to at least one percent of the purchase price, it's an opportunity worth exploring.
Fortunately, if you're wondering how to finance get a loan for an investment property, you have options. The following are some of the best loans forptions for financing investment properties.
Conventional Bank Loans
While the specifics depend on the lender, standard loans can certainly be used as a rental property loan. There are some advantages that typically go hand in hand with using a conventional loan for an investment property, like low interest rates and costs. Traditional lenders also allow you to take out multiple mortgages, though most have a limit. However, there's typically fairly high down payment requirements of at least 15-25% for investment properties, and your personal credit history and score factor into your ability to get approved for the loan.
FHA Multi-unit Financing
FHA loans for investment properties are backed by the Federal Housing Administration and can be used for new construction, purchases, and gut rehabs of existing properties. Unlike traditional loans, this financing option may only require a 3.5% down payment and may be a possibility for potential owners with a lower credit score than needed for a traditional loan. The catch? To qualify for an FHA loan for an investment property, you are required to reside in one of the units for at least a year.
VA Multi-unit Financing
If you're an active-duty service member, veteran, or spouse, you may qualify for a VA loan for an investment property . It's offered through both mortgage brokers and conventional lenders, and has no down payment, mortgage insurance, or firm credit score requirement. Like the FHA loan, you must reside in one of them to be eligible and may be required to have cash reserves to cover several months of expenses.
Portfolio loans are mortgages that are not intended to be sold on the secondary market. They are offered by private lenders, who may be community banks or credit unions, or mortgage brokers. They may be attractive due to their flexibility on term, down payment, and length, and interest rate along with their relatively lenient requirements. On the other hand, this lenient criteria often means that borrowers may have to stomach higher interest rates, higher fees, prepayment penalties, and even balloon payments; this means that you'll be stuck paying the full balance at the end of the short-term loan.
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