According to the U.S. Census Bureau, there are more than 48 million rental properties scattered across the country right now. Those who own these properties are able to generate extra income for themselves each month.
If you want to get in on this action, you should start your search for an investment property. After purchasing one, you can begin renting it out and create some extra income of your own.
There are many investment property loans you can use to obtain one of these properties. Today, we’re going to discuss the different types of loans for an investment property. We’re also going to provide you with some investment property loan tips that might come in handy.
Take a look at our investment property loan guide below. It’ll have you weighing the pros and cons of the different investment property loan types and deciding which one would be right for you.
Start by Deciding If You Need to Take Out a Loan to Purchase an Investment Property
In a few moments, we’re going to take a deep dive into the different types of loans for an investment property. But before we do that, we want you to ask yourself one very simple question: “Do I actually need to take out a loan to purchase an investment property?”
In some cases, the clear and obvious answer is going to be a resounding “yes!” You might not be able to afford the downpayment on an investment property, much less the entire asking price for one.
But in other instances, you might already have enough cash on hand to pay for an investment property. When this is the case, you might want to consider paying cash for it instead of taking out a loan.
You can, of course, still take out a loan for an investment property, even if you have enough cash to pay for it outright. It’s not always going to be in your best interest to sink all your cash into an investment property.
But you should at least kick the tires on the idea. It would be worth exploring paying cash for an investment property if you can.
Learn About the 4 Main Types of Loans for an Investment Property
If you give some thought to paying cash for an investment property and find that it’s just not in the cards for you right now, the next thing you’ll want to do is educate yourself on the different types of loans for an investment property. You shouldn’t just settle for trying to take out the first loan that you can find.
There are four main types of loans for an investment property that most experts would recommend. You should find out more about each of them and then decide which one would work best for you based on your specific situation.
Continue reading to discover more about these four types of loans for an investment property and what they each bring to the table.
-
Conventional Bank Loan
If you’ve ever purchased a piece of property before, then you’re probably already aware of what a conventional bank loan is. This is the most common type of loan taken out by those who buy homes.
When you apply for a conventional bank loan, a lender will check out your personal credit score and your credit report before sneaking a peek at everything from your income to the amount of money that you have set aside in savings. Their main goal will be to see how likely you are to repay the conventional bank loan that they’re going to give to you if you’re approved.
More often than not, you will be asked to put down a down payment when buying a piece of property with a conventional bank loan. Many lenders will ask for at least 20%, and in some cases, they’ll want 30% put down if you’ll be buying an investment property.
Additionally, lenders aren’t usually going to factor in any potential rent that an investment property might bring in when they look at your bigger financial picture. So you aren’t going to be able to use that to your advantage when you apply for a conventional bank loan.
Because of all this, a conventional bank loan might not be the best fit for those buying investment properties. But it would still be worth considering one if it’s your only option.
-
Hard Money Loan
We’ve spent a lot of time talking about how many people purchase investment properties and rent them out up until this point. But we should point out that this isn’t the only thing you can do with an investment property.
You can also buy an investment property, fix it up, and then sell it almost right away for a profit. It’s another great way to use an investment property to put some extra cash directly into your pockets.
If you plan on doing this, you might want to steer clear of some of the other types of loans for an investment property listed here and go with a hard money loan instead. This type of investment property loan is a short-term loan that you’ll usually be asked to pay back within about a year in many cases.
The great thing about hard money loans is that you won’t have to wait around for very long to get one. While it can take weeks and sometimes even months to obtain a conventional bank loan, you can get a hard money loan in a matter of just days in some instances.
As a result, this is the best type of loan for an investment property when you only plan on keeping it for a short period of time. As long as you can show a lender that you’re going to be able to repay the loan fast, it’ll prove to be a great option.
-
Private Money Loan
Not everyone has a rich aunt or uncle. But if you do, you might want to look into the possibility of taking out a private money loan!
A private money loan is pretty much exactly what it sounds like. It’s a type of loan that one individual gives to another individual for the purpose of purchasing a piece of property or something else. And it can be an option for those who happen to have a wealthy family member or friend who is interested in investing in their idea to buy an investment property.
Now, we should point out that borrowing money in the form of a private money loan isn’t going to be like borrowing $100 from a family member or friend. You’re going to have to make this type of loan official by having a contract drawn up for it stating the terms of the loan, including the interest rate for it and the expected repayment period.
We should also point out that borrowing money in the form of a private money loan could potentially be a big mistake in certain circumstances. If you invest in the wrong investment property and it doesn’t pan out for you and you default on a private money loan, it could hurt your relationship with a family member or friend forever.
This doesn’t mean that you shouldn’t still think about taking out a private money loan from someone you know. But it does mean that you should go into this type of situation with your eyes wide open so that you don’t make any crucial mistakes.
-
Home Equity Loan
If you already own a home and have equity built up in it, that equity could be used to secure the investment property that you’re interested in buying. A home equity loan is often one of the most attractive types of loans for an investment property to many people.
Many lenders will allow you to borrow up to 80% of the value of the equity that you own in your home. So if you have, say, $200,000 worth of equity in your home, you might be able to take out a home equity loan worth up to $160,000. That could be more than enough to buy an investment property.
There are some people who don’t love the idea of putting that much equity at stake for the sake of buying an investment property. But since you’ve taken the time to build up this much equity, you might want to go ahead and use it. It could be for the best in the end.
Whatever you decide to do, you should tread lightly when taking out a home equity loan for the purpose of buying an investment property. You don’t want to rush into anything and come to regret it later on.
See If You Qualify for Investment Property Loans
Now that you know all about the four main types of loans for an investment property, there is probably one loan type that is standing out more than all the rest. Whether it’s a conventional bank loan, a hard money loan, a private money loan, or a home equity loan, it’ll be up to you to see if you qualify for it.
If you don’t have a great credit score, you might strike out when you attempt to take out a conventional bank loan. By the same token, you might whiff when trying to take out a private money loan from a family member who isn’t interested in lending you a dime.
Prior to getting too excited about taking out an investment property loan, it’ll be important for you to find out if you even qualify for it. It’ll put you in a position to decide if you want to apply for a loan in the first place.
Make Sure Taking Out an Investment Property Loan Is a Smart Idea
We know that we made the idea of buying an investment property and renting it out to make extra money sound so easy earlier. But the reality is that it’s not always easy to turn an investment property into a cash cow.
Being a landlord can be a real challenge for some people. It has become more trouble than it’s worth for them.
You should make sure that you’re ready to deal with everything that will come along with taking out an investment property loan and using it to turn an investment property into a real asset. If you aren’t prepared to do what it will take to achieve this goal, you might want to think twice about taking out any of the different types of loans for an investment property.
If, however, you are fully committed to buying an investment property and using it to generate income, you should move full speed ahead with your initial idea. With a lot of hard work and a little luck, you can make buying an investment property one of the very best decisions that you ever made.
Which Type of Investment Property Loan Would Be Your Best Option?
If you’re all-in on the idea of buying an investment property, you should go back and read through the information we’ve provided on each of your loan options again. Each of the four types of loans for an investment property has its advantages.
From there, you should choose which type of investment property loan that you would like to apply for and then find some potential lenders. It’ll allow you to start filling out applications and seeing which investment property loans that you can get approved for.
By doing this, you’ll move one step closer to buying an investment property. It’ll be a very exciting development for you.
Get more tips on buying and selling real estate by browsing through all of the other articles that are found on our blog.
