Investing in real estate is a lucrative way to grow your money, just ask Warren Buffett. From a single-family home to a multi-family building, an investment property is an income-producing venture for years to come.
There are many ways to fund your first-ever foray into the world of real estate investing, such as (a) mortgages, (b) home equity loans and (c) investment property loans.
Stated Income Loans, et al. for Investment Property
Besides primary residences, mortgages have been used to purchase rental properties. Despite its investment-driven purpose, these mortgages are classified residential because they cover one-to-four unit properties.
- Stated income loans are made for self-employed professionals, small business owners and high net-worth individuals who are into real estate investing. It’s no surprise because a typical down payment on a stated income loan is 30% at the minimum. Stated income lenders also need a higher level of cash reserves sufficient to cover three to 12 months’ worth of monthly mortgage payments.
- By their stated purposes and intents, you can’t use an FHA loan to purchase an income-producing property. But situations are replete when it has been used for investing. Say you took out an FHA loan and then moved out of the house and have it rented out. In another case, you buy a duplex where you plan to occupy one unit and lease the other. Down payment for FHA loans could go as low as 3.5% for a credit score of at least 580.
- Conventional loans conforming to Fannie Mae and Freddie Mac’s standards can require at least 30% of the purchase price of the income-producing home as down payment. There should be enough cash reserves to meet six monthly mortgage payments. Moreover, a property management experience (being a landlord) of at least two years is required.
Home Equity Loans for Investment Properties
Home values are expected to rise by 3.5% this year per Zillow. This bodes well for those who own their home outright or hold a significant equity in their homes.
Second mortgages such as a home equity line of credit or home equity loan can be used to finance the down payment on the second home. Back this second mortgage with cash savings and asset holdings for emergencies.
Using home equity is a popular way to do some house flipping, it is when you buy a home, renovate it and resell it for a higher return.
Investment Property Loans
These specialized loans are for individual and commercial real estate investors. Investment property loans are structured to assist investors in:
- Financing and fixing properties
- Refinancing existing properties
One final word. Just some reminders to help you with your property investing venture:
- Do your homework first before you put your hard-earned money or home equity on any property.
- Make sure that the desired property is eligible to be financed.
- Expect to generally see higher down payment requirements, higher rates, and bigger cash reserves on investment properties.