Investing in real estate can be very profitable, but in order to make money, you must have money. Many investors opt to take out loans in order to purchase investment properties. This allows them to purchase properties quickly and without interruptions from having to save up money or raise their own capital which could take more time.
There are many types of loans offered for investment properties, however, you’ll want to consider the particular investment, your personal financial standing, and your overall goals with the project before deciding on a loan. You’ll want to ensure the return on the investment is high, the risk is low, and that the investment won’t mature after the loan is due.
Let’s take a look at the different types of loans offered for real estate investments and in what circumstances you would utilize each one.
Conventional Mortgage Loans
Conventional mortgage loans are offered by private entities, such as traditional banks or mortgage brokers. Standard requirements are a 20% down payment, a good credit score and history, and proof of monthly mortgage payments on other income properties if applicable. This is a very common loan for investors that are purchasing a single family home as an investment property. Investors who own a home themselves will likely be familiar with this type of loan.
Hard Money Loans
Hard money loans can be obtained through a lending company that specializes in financing real estate investments. These types of loans are sometimes preferred by real estate investors because they are much quicker and easier to secure than a conventional loan. While it is less of a headache to get approved, it is important to note that hard money loans are short term loans and come at a higher interest rate. Because of these factors, most investors seek out hard money loans on fix and flip projects.
Private Money Loans
Private money lenders differ from hard money lenders in the fact that they are not always professionals operating under a larger company. These individuals, often found within your personal network, seek out investments with solid returns to put their money into. Private money loans are very flexible and can be a great option for investors that were denied a loan from the bank.
Commercial Investment Property Loans
If you are investing in commercial real estate then the loans previously mentioned won’t work for you. Commercial investment property loans differ from residential property loans in that investors must present a lot more than a down payment and good credit history in order to obtain the loan. They must come prepared with a plan which could include rehab budget, improvements, time to complete, exit strategy, etc. These types of loans would be useful for properties such as multifamily apartments, office buildings, hotels, or retail spaces.
Whether you are investing in a commercial property or a residential property you can surely find a financing option that suits you! With an abundance of options, the best loan is the one that fits the type of property you're investing in, supports your financial standing, and helps you accomplish your goals.