Real estate investing involves purchasing an investment property to generate profit. An investment property is real estate that isn’t a primary or secondary residence. It’s a piece of property that will not be occupied by the owner.
“This is my strategy: not to negotiate. That is negotiation.” — Fredrik Eklund
An investment property can be a long-term commitment or a short-term endeavor, such as “house flipping”, where a home is purchased, renovated, and then sold at a profit. Regardless of the specifics, the needs of real estate investors are different from the needs of a typical home buyer, so working with a lender who understands your goals is beneficial.
Whether a borrower plans to purchase a single-family home, townhouse, condominium, or multi-family dwelling, there are different requirements to secure a loan on an investment property versus obtaining a mortgage for residential purposes. Since investment properties inherently carry more risk, the financing guidelines are different from traditional loans – they also offer additional benefits:
- Rental opportunity: Renting out your property to tenants creates additional cash flow. Consider purchasing properties near downtown areas, vacation spots or college campuses as these are popular among renters.
- Increased cash flow: Your investment property can provide income to offset your expenses. You may even profit from your rental property!
- Potential tax benefits: There can be many tax advantages to owning rental properties, such as deductions for mortgage interest, property and real estate taxes. Be sure to consult a tax adviser.
- Build your investment portfolio: You can diversify your portfolio by owning an investment property.
If you’re considering real estate investing and an investment property loan, here are a few different property types and the pros and cons for purchasing and maintaining them:
Vacation Investment Property
- Beach or ski rentals can yield the equivalent of a month’s long-term rent in a week.
- Vacation rental services can supplement and even a few nights a month can add up to the mortgage being covered
- You can use when you wish
- Popular areas can be very expensive
- Frequent turnover means you need to be an active landlord
- More tenants heighten risk for damage
- May sit vacant off season
College Investment Property
- Almost always a demand
- High rents because college-owned competition charges top dollar
- Rental market is calculated with each individual tenant’s share compared against dorm or college-owned apartment rates (as opposed to one rate for entire property)
- The area markets itself
- You can have property do double duty if you buy where your children plan to attend school
- Rent short term during summer or off season for orientation, summer school, sports competitions, etc.
- Frequent turnover; 8 – 9-month leases standard
- Risk of damage, noise complaints, repairs, tenant conflicts
- “Off season” may cause vacancies, but high rents during year should compensate
Long-term Investment Property
- Steady tenants, sometimes for years, allow you to know and trust who is caring for your home and build equity
- Low turnover can help you anticipate repairs (tenants have proven they won’t damage property, but regular upkeep will still be necessary)
- It can be a “passive investment.” If management company is utilized, it can handle all leasing, tenant interactions and repairs.
- Track market and sell when it’s most advantageous
- Monthly rents won’t be as high as vacation or college rentals
- It’s a recommended business practice that rents for long-term tenants should cover your mortgage, repairs, and other expenses including HOA. A landlord who doesn’t maintain property or raises rents at every opportunity will get a bad reputation in the region.
Real Estate Flip
- Decent money can be made in a short amount of time
- If you can sell fast enough, you may only have one or two mortgage payments
- High level of personal satisfaction and creative release involved with rehabbing a house
- It’s a lot of work and there can be unforeseen, costly expenses and repairs
- If you can’t sell quickly, you risk your profit and may have to pay mortgage longer than anticipated
- You should know the market, area, and home repair very well to succeed
It’s still a great time to get into the real estate investing realm. The returns can be significant and the experience, rewarding.
Ready to take that step and borrow towards real estate investing? Here is some advice:
Have money for a large down payment—you will need at least 20% to put down to obtain traditional financing on such a property since mortgage insurance does not apply. With 25% down, you may even qualify for an even better interest rate.
Check your credit score—you could end up paying more for the same interest rate if your score is under 740 or having to accept a higher interest rate. Lenders will also want to see that you have at least six months of personal and investment-related expenses available.
You have options—Consider looking into a smaller neighborhood bank to get financing for your investment property loan rather than a big bank if you don’t have as big of a down payment as you’d like.
Owner financing—ever since credit became harder to come by, asking for owner financing can help you get a loan on terms that better suit your particular needs.
Get creative—ready to pull the trigger on an investment property with a high probability of making you a profit? Take advantage of other means of obtaining a down payment by way of a home equity line of credit, credit cards, or life insurance policies.
Our residential investment property loans are asset-based not income-based, making it easier to qualify W-2 and self-employed investors for rental property financing.
At Sterlings Rowe Financial Group, we add value by providing a smart, fast and easy way to fund residential investment property loans. Submitting a loan is a familiar process. All that’s needed is a 1003(app) and a credit report to get started.
We have the freedom to set our own underwriting guidelines. And because our common-sense, asset-based lending approach is focused on the property’s value and revenue-generating potential instead of the borrower’s personal income, you’ll have the ability to fund loans that traditional lenders can’t.
- FlexPerm Loan: An uncomplicated option that combines the security of a fixed-term loan with flexible fixed-term lengths and the option to remain in the loan for up to 30 years with no balloon payment.
- Credit QuickFix Loan: An interim solution designed for investors with minor credit issues seeking a lower-cost, interest-only, short-term loan as an alternative to hard money financing.
- ARV Pro Loan: Designed for “fix-and-flip” investors looking for a short-term, interest-only loan to acquire and improve a residential investment property based on its “as repaired value” (ARV).
Our rental property loan financing specialists are experts at qualifying W-2 and self‑employed real estate investors.
Most brokers are already familiar with these properties, so the move from consumer home loans to rental property loans provides a fast track for creating a new revenue stream without having to change the way they already do business.