It’s no secret that owning property is one of the best ways to accumulate wealth. This is due to its capability to provide the investor with passive income while they focus on other business endeavors.
But, real estate is expensive, and not everyone has access to the necessary funds to secure ownership of new property. There is, however, a solution.
Real estate loans offer investors a way to make money off of property they own and use the profits to pay back what they borrowed.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at all you need to know to secure a loan for real estate.
Before You Invest
It may be tempting to pool your cash together and go on the hunt for property that you can use to generate profit. But, there are some things you should keep in mind before you begin.
Down Payments Are Crucial
As with any other investment, the more you put down at first, the less you’ll have to borrow and pay back in the future.
With real estate, however, there is an added bonus of putting more cash on the table at the beginning: foregoing Private Mortgage Insurance (PMI).
This will further increase the amount that you pay each month, so it’s best to avoid this at all costs when looking to make money from an investment property.
Thus, make sure that you have at least 20 percent of the total value on hand so you can save money in the long run.
It can be quite intimidating to put so much money into an investment property and then have to manage everything yourself. Having a partner to invest alongside you can not only put your mind at ease, but it can also give you access to a higher quality property.
As with any partnership, make sure you’re familiar with who you choose.
Friends and family are solid options, but you should still have an official agreement in place so to ensure that everyone involved adheres to the initial agreement.
Good Credit Goes a Long Way
A general rule of thumb to keep in mind is that the more money you want to borrow, the better your credit score needs to be in order to secure a manageable interest rate.
So, if your credit is still making its way up toward the “good” category, you may want to forego real estate investing until you take care of any credit issues you may have.
But, if your credit is poor and you need to invest soon, you’ll be pleased to know that there are plenty of installment loan lenders who are lenient when it comes to your financial history. You can read more about that here.
Noteworthy Financing Options
Those of you familiar with these types of loans may be surprised to see them mentioned in this article. As per the guidelines of Federal Housing Administration (FHA), these loans are only available to individuals who intend to live in the property.
But, there is a loophole that you can take advantage of.
There’s nothing in the terms of these loans that prevents you from using the money to purchase a duplex or triplex and rent out the units you don’t reside in.
If you choose this course of action, you’ll be pleased to find out that your down payment can be as low as 3.5% of the property’s total cost. Thus, FHA loans are great for those who don’t have a ton of cash to work with.
As previously mentioned, you will have to reside in at least one unit of a multi-unit property, so you may have to charge tenants a bit more than you might otherwise to make up for the difference.
While asking the owner of the real estate about financing options may seem unconventional, it’s a viable option if you’re looking to secure funding for investment property.
This process is no different than how you would handle a conventional loan from a bank. In this case, however, you would discuss the terms and make your payments to the owner instead.
If the real estate is owned by a property management company, it likely won’t be difficult for you to have a conversation about owner lending.
Individual owners, however, are another story. If they even have the finances to lend you, you’re going to have to be a lot more convincing since it’s strictly their personal money.
This also means your contract will be a lot stricter and may have terms that are a bit unpleasant (higher interest, shorter repayment periods, and so on), but you may be able to work something out in your favor depending on the individual.
These loans are technically a type of FHA loan, but they have a different purpose. But, it’s one geared toward investors.
203K loans differ from conventional FHA loans in that they factor in the cost of necessary renovations into the total of the loan. This means that your options are greatly expanded, as you can now consider duplexes, triplexes, or even quadplexes that need extra work.
From here, the process is identical to an FHA: rent out the unoccupied space and begin building passive income.
Real Estate Loans Can Seem Difficult
But it doesn’t have to be.
With the above information in mind, you’ll be well on your way to securing real estate loans that can help you establish a stream of passive income.
Want to learn more ways you can make money from a residential property? This article has plenty of useful information.