5 Things to Know About Investment Property Loans
If you are thinking about investing in real estate beyond your primary residence, there are plenty of things you should research. This is especially true when it comes to how you are financing the purchase. Be sure and follow the PropertyLark Blog for weekly articles and information on a variety of real estate investment topics. Today, we want to talk about investment property loans and how they differ from traditional mortgages.
Here are 5 important things you need to know about investment property loans:
1. Higher Down Payments
Some mortgage loans can be secured with down payments as low as 3-10% or sometimes even 0% down with certain government-backed programs designed to encourage first-time home buyers. This is not the case with investment properties. Lenders are assuming more risks with investment property loans because it is not the owner’s primary residence. Most investment property loans will require down payments as high as 15-20%. Private mortgage insurance (PMI) is not available on investment loans, so that means the borrower has to cover the risk with a larger down payment. As you gain experience as a real estate investor, you may start to get more favorable loan terms with future purchases.
You can look into personal loans and investor financing outside of banks and mortgage lenders who are more focused on traditional home loans. You may also want to consider cashing out some of your equity or establishing a home equity line of credit (HELOC) that can help you cover your investment property down payment and renovation expenses.
2. Good Credit Rating Required
Because the lenders are assuming more risk on investment property loans, the qualification standard will be stricter. You may need a credit score around 720 or higher. Some borrowers may be able to secure a loan with a lower rating, but the trade-off is usually higher interest rates, higher down payment and a lower required loan-to-value (LTV) ratio.
3. Higher Interest Rates
Speaking of interest rates, you can typically expect these to be higher with an investment property loan compared to a traditional mortgage loan for your primary residence. It may also depend on how you intend to use the property. If this is a “second home” that you intend to live in part of the year, you may get more favorable terms (though still usually not as good as a standard mortgage loan). If it is purely an investment/income property, then you may expect your interest rates to be around .5-.75% higher.
4. Cover All Your Costs
Buying an investment property usually involves much more than the cost of the house itself. You have to factor in renovation expenses and other ongoing ownership expenses (repairs, utilities, insurance, property management fees, etc.) if you plan to hold onto it as a rental property. An investment property loan may not cover all these anticipated expenses, or you may need to structure it in such a way that your costs are incorporated into the final loan amount. The downside is this will lead to a more expensive loan.
5. Are You Ready to Invest?
This question isn’t specifically related to investment property loans, but it is an important one to ask yourself before you start pursuing ownership of income properties. You need to approach your real estate investments with a proper business plan and make sure you are truly ready for this significant commitment of time, money and other resources. If you are indeed ready for this venture, then do all the necessary research and preparation to make smart decisions—especially when it comes to your financing options!
Whether you secure your funding through a loan, investor partnerships or other creative buyer financing options, you just want to make sure you avoid common mistakes that many first-time real estate investors make. A cash purchase will put you at a major advantage, but there are plenty of things to know about cash real estate investment, as well. That’s a different topic for a different day!
For all your real estate investment needs, consider joining the PropertyLark home buying network. We help you out with resources, information and property search tools to be a successful real estate investor.