As the pandemic hit, the US housing market ground to a halt. But once the country began to reopen, buyers were ready to get back into the real estate market. As a result, US home prices skyrocketed, jumping up 31% since spring 2020.
With high prices and rising interest rates, getting into real estate investing can feel impossible. But many investors are still turning to real estate to diversify their portfolios and boost their income. Real estate can be a vital tool for achieving long-term financial goals.
Real estate loans can help you get the necessary funds for your real estate investment project. Read on to learn about buying a property with real estate loans.
Real Estate Financing Explained
Real estate financing is how investors secure funds to buy or renovate a property. There are many ways investors finance these purchases, but most involve securing capital from an outside source through a loan. These loans typically fall into investment or developmental categories, depending on what you wish to do with the property.
Each type of loan will be underwritten and have its own terms. Lenders will typically require borrowers to meet specific requirements and put up collateral. Most investors then use the rental income they collect or the money from the sale of the renovated property to pay off these loans.
Types of Real Estate Loans
Many investors believe that real estate investing is difficult because they think you need a lot of money to get started. But there are a variety of real estate loans that can help you fund whichever investment you choose. Here are four common property investment loans.
Conventional Bank Loans
If you already own a home with a mortgage, you are familiar with this type of loan. These loans have to meet Fannie Mae or Freddie Mac regulations, are not backed by the government, and often require you to put a 20% down payment for the property. Investor loans also have to conform to these guidelines and typically require a higher down payment.
Banks will look at your credit score, credit history, income, and assets. These types of loans do not consider the future rental income when lending. Banks want to assume less risk and check these things to ensure you can pay back your loan.
Hard Money Loans
Hard money loans are short-term, high-interest loans typically provided by private companies or individuals. These loans are more common for flip projects rather than rental properties. As a result, they often use the property’s after-flip value to determine if you can repay it.
While lenders consider your income and credit, the primary qualification for these loans is the AFV. This factor makes these loans easier to get. But, keep in mind these loans have a high-interest rate which could impact your profits if your project goes poorly.
Private lending loans are loans from private individuals. These can be friends, family, or other real estate investors. These investors typically provide this money with a specified interest rate and set a timeline for the repayment of the loan.
With the right connections, these loans can be easy to acquire. But you should do your due diligence and get your loan terms in writing to prevent disputes. They often use the property itself as collateral.
Home Equity Loans
Home equity loans allow you to use up to 80% equity of your property to finance your real estate project. You can also do a home equity line of credit that allows you to borrow some of your home’s value and pay it back in monthly payments. These loans can alter your financial situation, so be mindful of your changing interest rates.
Don’t Agonize Over Financing Your Real Estate Investment
Don’t be discouraged from improving your financial portfolio by thinking you don’t have the capital to buy property. Real estate loans are available if you are willing to look. Take the time to learn about your options to determine the best path to achieve your financial goals.
Do you want more real estate investment tips? Check out the real estate section of our website for more articles like this one.