Owning rental properties is one of the best ways to make money in real estate. Aside from the fact that you are in charge of this type of business, it provides you with good cash flow and ensures property appreciation as you go along!
However, one of the challenges when it comes to owning rental properties is the initial investment. You need to come up with a huge amount of money for the property purchase and improvements.
This is where property investment loans come in. In a way, these loans make it less daunting for new property investors to get started in the business. It allows them to purchase a property by paying only a small amount upfront and then pay back the loan over time with the rental income earned from the property.
In this real estate investment guide, we will discuss why you should take out these types of loans when buying rental properties, how to choose the right financing option, and some tips on purchasing a rental property to start off your investment journey.
4 Main Benefits of Using Property Investment Loans When Purchasing a Rental Property
There are many reasons why property investment loans are a great financing option when buying rental properties. Here are four of the main benefits.
1. You can purchase a property with a small amount of money upfront.
As previously implied, taking out a property investment loan will provide you with enough capital to make the down payment for your purchase. This is perfect for new property investors who do not have a lot of cash to start with.
You can purchase your first rental property by paying only a small percentage upfront, which is usually around 20%. The remaining balance will be paid through monthly installments over the loan term.
This way, you can get started in your rental property business without having to worry about coming up with a huge amount of money all at once.
2. You can use the property as collateral for the loan.
Another great thing about property investment loans is that you can use the property itself as collateral for the money you borrowed. This means that if you default on your payments, house loan lenders can seize your property and sell it to recoup their losses.
This type of security gives lenders more confidence to get you pre-approved for your mortgage even if you have a less than perfect credit score. On the other side of the coin, it allows you (as the borrower) to get lower interest rates since there is less risk involved for the lender.
3. The interest paid on the loan is tax deductible.
Yes, you read that right! When you use an investment mortgage loan when purchasing a rental property, the interest payments are tax-deductible.
This is a huge advantage, especially for high-income earners who are in the higher tax bracket. This deduction can amount to a significant amount of money over the life of the loan. And, it’s one of the main reasons why property investment loans are so popular among real estate investors.
4. The rental income earned from the property can be used to pay off the loan.
Of course, one of the main goals of owning a rental property is to earn income from it. And, with these types of loans, you can use this income to pay off your loan.
This is a great way to make sure that your property investment business is self-sustaining. Plus, it gives you peace of mind knowing that your property is slowly but surely becoming yours free and clear.
Now that we've discussed some of the main benefits of using property investment loans, let's take a look at how to choose the right financing option for your needs.
How to Choose the Right Financing Option for Your Rental Property Investment
There are many different types of property investment loans available, and it can be difficult to know which one is right for you. Here are some factors to consider when purchasing a rental property.
The first thing you need to consider is the loan term. These types of loans usually have a shorter loan term than traditional home loans. This is because lenders see rental properties as a higher-risk investment. As a result, you will usually be offered a mortgage option with a loan term of around five years.
However, you may be able to find some lenders who are willing to give you a longer loan term if you have a good credit history.
Of course, you would like to get a loan with lower interest rates. However, property investment loans are considered to be a higher-risk investment by lenders. As a result, the interest rates on these types of loans can be higher than traditional home loans.
Be that as it may, there are still ways to get lower interest rates on these loans. For instance, you may be able to negotiate a lower rate if you have a good credit score or if you agree to pay a higher down payment.
With lower interest, it will be easier for you to pay off your loan and make a profit from your rental property.
Type of Loan
As with any other type of loan, financing for property investment grants you a couple of options: fixed-rate and adjustable-rate.
A fixed-rate loan means that your interest rate will remain the same for the duration of the loan. This option is best if you are looking for stability and predictability when it comes to your monthly payments.
On the other hand, an adjustable-rate loan means that your interest rate can change over time. This option is best if you are planning on selling the property before the end of the loan term or if you expect interest rates to decrease in the future.
Type of Property
Last but not least, you need to consider the type of property you are looking to purchase. Investment properties come in all shapes and sizes, from single-family homes to multi-unit buildings. And, the type of property you choose will affect the financing options available to you.
For instance, if you are looking to purchase a multi-unit property, you may be able to get a loan that allows you to finance a higher percentage of the property value. However, if you are looking at a single-family home, most lenders will only finance a lower percentage of the property value.
Keep these factors in mind when choosing a property investment loan, and you’ll be on your way to success in this type of business!
3 Fundamental Qualities of a Good Mortgage Lender
While taking out property investment loans is a wise decision to make, it is still important that you choose a reputable and reliable mortgage lender to provide you with the financing that you need. Here are some qualities to look for during your search.
1. Specializes in Rental Property Investment Financing
Ideally, the home loan mortgage companies that you consider are those which also specialize in rental property investment financing. This way, you can be sure that they are familiar with the ins and outs of this type of loan and can provide you with the best possible options.
A specialist will also be able to give you more personalized attention and service, which is always a plus.
2. Offers Competitive Interest Rates
As we mentioned before, these types of loans could have higher interest rates than traditional home loans.
However, this does not mean that you cannot find a lender that offers competitive rates. There are many home loan mortgage companies out there that compete for business by offering lower interest rates.
So, do your research and compare the rates of different lenders before you make your decision.
3. Provides a Variety of Financing Options
A good rental property mortgage lender should have multiple financing options to give borrowers more flexibility.
For instance, they could offer debt-service coverage ratio (DSCR) loans, bank statement loans, and full documentation loans. With more options available, you can choose the loan that best suits your needs.
At the end of the day, you should look for a mortgage lender who has experience with rental property investors and understand their unique needs. Don’t hesitate to ask around for recommendations or do some research online to find the best fit for you.
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Buying Your First Rental Property: Important Things to Look Into
Once you get pre-approved for a loan, it is time to start looking for your first rental property. Here are some important factors to keep in mind when checking property listings.
When it comes to real estate, location is key. You want to choose a property that is located in an area with a high demand for rental units.
A good way to find out about the demand in a certain area is to talk to property management companies and ask them about their vacancy rates.
You should also consider the demographics of the area when making your decision. For instance, if you are looking at properties near a university, you will likely have no trouble finding tenants. However, if you are looking at properties in a more suburban area, you may have difficulty finding tenants who are willing to pay top dollar for rent.
Capitalization Rate (Cap Rate)
This is a very important metric to use in buying a house as a rental property, especially when you are looking at one that is currently being rented out. In essence, it gives you an idea of how much income you can expect to generate from the property.
To calculate the cap rate, you will need to find out the property’s current market value and its annual net operating income (NOI). Once you have these two figures, simply divide the net operating income by the property’s market value.
For example, if a property has a market value of $200,000 and an annual NOI of $20,000, its cap rate would be 0.10 or 10%. In general, properties with cap rates of 8% to 12% are more desirable as investment opportunities since they offer higher returns on investment.
Condition of the Property
When buying a rental property, you would want to make sure that it is in good condition and does not need any major repairs or renovations.
If the property needs major repairs, it may be best to pass on it since the costs of fixing it will definitely eat into your profits. But if you are interested in a certain property and are willing to put in the work, be sure to factor in the cost of repairs when making your offer.
Local Rental Laws and Regulations
Real estate laws can vary from one state to another, so it is important to be aware of the regulations in the area where you are looking to invest in a rental property.
For instance, some states have laws that protect tenants from being evicted without cause, while other states do not have such laws in place. There are also places that have restrictions on how long a property can be rented out. On the same note, some states would not allow you to expand your property because of some zoning regulations.
It is important to know about these laws before buying a property so that you can avoid any potential legal problems down the road.
As a smart investor, you would want to pay a fair price for the property, based on its location, condition, and potential rental income. Ideally, you should find a property that is priced below its market value so that you can get a good deal on it.
If you are not familiar with the current median prices of the rental properties in a certain area, it would be best for you to tap on the expertise and knowledge of a local real estate agent. Not only will they be able to tell you about these numbers, but they will also be able to negotiate on your behalf so that you can get the best possible price for the property.
The bottom line is that there are many things to consider when buying a rental property. But if you do your homework, you will surely find a property that will make you successful as a landlord.
Taking out property investment loans is an important part of buying rental properties. So, be sure to shop around for a lender that offers competitive interest rates and multiple financing options.
Also, when searching for a property to purchase, you should work with professionals who can guide you in making smart decisions.
With the right property and financing option in place, you can start generating income from your investment quickly. So, don’t wait any longer and start looking for that perfect property today.
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