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By Evelyn Long
As a real estate investor, there are a lot of moving parts to any investment opportunity. Whether you’re brand new to the world of investing in real estate or you’re a longtime veteran with many irons in the fire, there are a few different loan opportunities for real estate investors.
Of course, everything is different from person to person, and everyone’s financial situation is different. Different loans are going to serve different purposes, and it’s good to look into your options. Here are the different types of loan options available for real estate investors.
Who Needs a Loan?
One of the first questions you might be asking yourself about investing in real estate is whether you need a loan in order to get started.
Most people will require some sort of loan or assistance in order to get started on their project. In this way, it’s similar to purchasing a house for your primary residence — property is expensive, and most investors, particularly newbies, simply do not have that kind of cash on hand.
However, some real estate investors aim to avoid taking out property loans for investment properties. They achieve this by building their portfolios over time and focusing on low-cost, flippable properties, or pursuing tax-deferred exchanges to fund new properties while selling old ones. Others use a sizable windfall or nest egg to break into real estate investing.
The following sections will provide a basic entry to loan options. However you finance your property, just put your own household’s well being first and weigh risk, cash flow and potential profits with proper consideration.
A Conventional Bank Loan
This is the most common type of loan opportunity that comes with real estate. If you own a home, this is the type of loan you might already be familiar with. Another name for this type of loan is a conventional mortgage.
If you know anything about a traditional mortgage, you’ll know that the application process and requirements will likely be similar when it comes to an investment property, too. This is one of the more conventional options, and it makes sense for mortgage-like investment projects such as houses and rental properties.
Hard Money Loan
If you want to get a bit more serious and specific about real estate investments, hard money loans are often distributed by companies specializing in investment properties.
What sets hard money loans apart from other types of loans is that the companies usually base the loans on the value of the investment property rather than the investor’s income or other financial requirements. This makes it a great choice for people investing in cheaper properties with the intention to flip them or renovate them.
Private Money Loan
As opposed to hard money loans or loans from a company, private money loans are loans that come from someone who isn’t an industry professional. Instead, this is just a person looking to make an investment and a good return on that investment. Of course, these types of loans are slightly less organized and official, as they usually take place between an investor and a person who knows them personally.
However, it’s still important to go through the necessary official channels to keep everything in writing. That way, everything remains above board. Even still, these loans tend to be in favor of the investor, with favorable interest rates and other features like that.
Home Equity Loan
Although this might be a little bit different from what you normally think of as an investment loan, a home equity loan is most favorable in situations where you already own the property you are investing in. This means you are borrowing against existing equity you have built up in your home already, usually somewhere around 80% of your home’s value.
This usually applies to things like renovation projects or rental units on the property that you already own. This also means this is the type of loan that is best for people who are taking on smaller-scale projects rather than large investment properties or house flipping.
Types of Real Estate Investment Loans
No matter what kind of real estate investment project you plan to undertake, a loan might be in your future. Although each different type of loan serves a different purpose, doing a bit of research will help you figure out which one is right for you and your financial situation.
Whether you take a traditional mortgage out or you go for a private loan, working on your investment property will help you keep your finances in check for years to come.
Author
Evelyn Long is the editor-in-chief of Renovated. Her real estate work has been published by the National Association of REALTORS®, Rental Housing Journal, and other online publications.
