When deciding on the best type of loan to get for your investment property, you must first determine your intent with the property and how long you plan to own it. Generally speaking, there are two possibilities. The first is buying a property to use as a rental. The property can be commercial or residential. Your intent with this property is to keep it for a while and make a profit by renting it for more than the monthly mortgage payment. The other option is to buy a property that you plan to fix up and resell in a short period. When you are flipping the property quickly, you are less concerned with the long-term interest on the loan because you aren’t going to own it for long.
Loan for a Rental Property
If you are planning to keep the property as a rental, your best option is a low-interest, long-term loan. Low interest and long term will ensure a low monthly payment. The lower the monthly payment, the more profit you can make quickly by renting it for more than the mortgage payment. Additionally, a higher down payment on a rental property will increase the monthly profit by further lowering the monthly mortgage payment. There is no need to think about paying the loan off early because you’ll be making a profit every month; you don’t need to wait until the end to see a profit.
Loan for a new Property Flip
The goal with a property flip is to own the property for the least amount of time possible, so the long-term costs of a loan are of no consequence. You do not need to be overly concerned with the interest you are paying on the loan because you shouldn’t own it for more than a couple of months. A highly successful house flip is completed in less than a month, so you aren’t making any mortgage payments. Likewise, as long as the mortgage payment is within your budget, you can also apply for a shorter-term loan if that makes it easier for you and your lender to move forward quickly.
Loans for Hybrid Investment Opportunities
While the majority of property investment purchases will fall cleanly in one of those two categories, there are times when it is not so clean. For example, you may buy a multi-family unit and live in one of the units while you rent out the others. Another example would be a long-term flip. The idea behind flipping houses is to move quickly, but some investors do not have the time or financial resources to renovate a house for resale swiftly. Some buy a house that needs to be renovated but is livable, and then move in, so they can make the renovations as time and money allow. In these situations, the best course of action is to get a low-interest, long-term loan.
If you’re also looking into investing in mortgage-backed securities, first start by studying Freddie Mac and Frannie Mae. Then start studying equity REITs, which is a real estate investment fund that purchases properties and distributes the money made from those investments to shareholders.
It is essential to be clear with your lender that you are looking for investment home loans. You will not be eligible for any sort of first- time home buyer or residential home buyer loans or discounts because you are not planning to live in the property. However, there may be specials for investment properties that are not available to homeowners. The loan rates available to you will depend on a wide range of factors that your lender will be able to explain.
First Mac has been helping both homeowners and investors buy properties for many years, and they have the experience and knowledge to ensure you are getting the best possible loan. If you are unsure of your long-term intentions with the property as explained above, your First Mac financial advisor can walk you through your options and make educated suggestions on what may be best for your business.