Financing an Investment Property: Should You Consider Getting a Loan?
Investing in a property is always a risk, but it can be an incredibly rewarding experience. When done correctly, property investments can provide a steady stream of income for years to come. However, financing an investment property can be tricky- especially if you don’t have the cash on hand to cover the purchase price. In this article, we will explore a few different ways that you can finance an investment property: conventional bank loans, hard money loans, private money loans, and more. Let’s get started
Conventional Bank Loans
A conventional bank loan is a type of loan that is offered by a traditional bank or lending institution. This type of loan is typically available to those who have good credit and a steady income. Conventional bank loans are a popular choice for financing an investment property, as they offer low-interest rates and flexible terms. However, they can be difficult to obtain if you don’t have a high credit score. In addition, the approval process can take some time, so it’s important to start the application process well in advance of your desired purchase date.
Conventional bank loans come with a variety of terms and conditions, so it’s important to read through the agreement carefully before signing anything. Be sure to ask questions if there are any aspects of the loan that are unclear.
Hard Money Loans
Next, we have hard money loans. This type of loan for property investment is typically provided by private investors or lending companies. Hard money loans are often easier to obtain than conventional bank loans, but they come with a higher interest rate. In addition, hard money loans typically have a shorter repayment timeline- usually around 12 months. This type of loan can be a good option if you need to finance an investment property quickly and you don’t have time to wait for a conventional bank loan to be approved.
Again, it’s important to read through the terms and conditions of a hard money loan before signing anything. Be sure that you understand the repayment timeline and interest rate. In addition, be prepared to put down a large down payment- typically around 20%.
Private Money Loans
Private money loans are another option to consider when financing an investment property. A private money loan is a loan that is provided by a private individual or lending company. Private money loans typically have a higher interest rate than conventional bank loans, but they can be easier to obtain. Also, when working with a private lending company, you may be able to negotiate a more flexible repayment schedule. If you are considering getting a loan to finance your investment property, private money loans are definitely worth considering. However, it is important to do your research and compare different lenders before making a decision. Be sure to shop around for the best interest rates.
Another option for financing an investment property is to tap into your home equity. Home equity is the portion of your home’s value that you own outright- it’s the difference between your home’s appraised value and the amount that you still owe on your mortgage. If you have built up equity in your home, you can use it as collateral for a loan. This type of loan is called a home equity loan or HELOC (home equity line of credit).
A home equity loan is a lump sum of cash that you can use to finance an investment property. This type of loan typically has a lower interest rate than other types of loans, making it a popular choice for those looking to finance an investment property. However, it is important to remember that your home equity is at risk if you default on the loan.
A HELOC is similar to a home equity loan, but instead of receiving a lump sum of cash, you are given a line of credit that you can draw from as needed. This type of loan can be a good option if you are not sure how much money you will need to finance your investment property. However, it is important to remember that the interest rate on a HELOC may be variable, so it’s important to watch the market closely and be prepared for changes.
Another option for financing an investment property is to do a cash-out refinance. A cash-out refinance is when you take out a new loan to replace your current mortgage and you receive a lump sum of cash at closing. The amount of cash you get, you can use for any purpose, including financing an investment property.
A cash-out refinance can be a good option if you have built up equity in your home and you want to use that equity to finance an investment property. The interest rates on a cash-out refinance are typically lower than other types of loans, making it a more affordable option.
Financing an investment property can be a challenge, but there are a number of different options to choose from. Be sure to do your research and compare different lenders before making a decision. Also, be sure to watch the market closely and be prepared for changes. With careful planning and execution, financing an investment property can be a great way to build your portfolio.
Chris Evan was born in Quebec and raised in Montreal, except for the time when he moved back to Quebec and attended high school there. He studied History and Literature at the University of Toronto. He began writing after obsessing over books.