Park City investment property prices and mortgage rates are on the rise, making it more challenging for investors to acquire commercial real estate. Consider these financing options for investment property when expanding your real estate portfolio.
- Conventional Bank Loans
Applying for a conventional mortgage is one of the most common ways to finance an investment property. A conventional mortgage conforms to Fannie Mae and Freddie Mac guidelines. It is issued by a bank and is not backed by the federal government.
Lenders typically look at your credit score, credit history, and income and assets when deciding to approve your loan application as well as determining your interest rate. It’s also worth noting that lenders don’t typically include projected future rental income on the property when calculating your debt-to-income (DTI) ratio.
You should be able to demonstrate that you can continue to pay off any existing mortgages in addition to monthly loan payments on an investment property. It’s generally advisable to have at least six months of cash for on-going mortgage obligations. Once approved, you will be expected to make a down payment of about 30% of the purchase price.
- Hard Money Loan
This is a short-term loan that allows investors to raise money quickly and which has a shorter payback period than a conventional loan. It is best suited for borrowers who intend to flip an investment property – the practice of improving a property to sell – as opposed to the buy and hold approach, or developing and renting out investment property.
Mainly used for real estate transactions, a hard money loan is secured by collateral, often real property, and not the borrower’s financial standing, thus shortening the time frame for approval. Lenders usually calculate the estimated after-repair value (ARV) to determine whether you’ll be able to repay them. A hard money loan application can get approved in just days instead of several weeks or months.
Hard money loans typically come from a company or individual, not a bank, since banks only offer conventional mortgages. Interest rates can go upwards of 18%, and in most cases, the loan must be paid off in less than a year.
It’s common for investors to take out a hard money loan then pay it off immediately with another type loan, such as a conventional mortgage, home equity loan, or private loan. This is often the case for investors who don’t plan to flip the property.
- Private Money Loans
The most common source of private money loans are often friends and family of the investor. Some investors attend real estate investing clubs and networking events in order to find someone who may be willing to lend the money.
In any case, the terms and rates for private money loans vary significantly depending on the borrower’s relationship with the lender. These loans are often secured by a legal contract allowing the lender to foreclose on the property if the borrower becomes unable to make payments.
If you don’t have the cash to fund a down payment yourself, it may be possible to use gifted funds, but the gifts of cash must be documented.
- Home Equity
You can tap the equity in your existing home through a home equity loan or a home equity line of credit (HELOC) in order to finance an investment property. You may be able to borrow up to 80% of your home’s equity value when purchasing or repairing an investment property.
When deciding between home equity loans and HELOCs, keep in mind that a home equity loan is generally more suitable for a single purchase that requires an exact dollar amount for sales price, repairs, and rehabilitation of the property. A HELOC is often used for buying and selling multiple properties in rapid succession as opposed to taking out multiple home equity loans.
You can also opt for a cash-out refinance, which often has a fixed rate and may prolong the duration of your existing mortgage, which could mean paying more in interest for your primary residence.
Locate your next investment property with Team Schlopy. Call our agents (435) 640-5660