There are many reasons why people choose to invest in real estate: passive income, stable cash flow, tax advantages, etc. There are also many ways in which you can go about investing in real estate. As most people know, you need to have money to get started in real estate, however, it doesn’t have to be your own. There are various real estate investment loans out there to choose from, and it’s important to know which is right for you. Finding the best possible financing options requires some research, which is why we’ve put together a list of the pros and cons of four different types of investment property loans.
Conventional loans are one of the most commonly used real estate investment loans. They’re usually issued by traditional lenders such as credit unions, banks, and mortgage brokers.
Pros: If you have a good credit score, rates and fees for conventional loans are usually lower than those of other investment property loans.
Cons: A down payment of at least 20% of the property’s purchase price is usually required, so investors need to be prepared with that money up front.
Federal Housing Authority Loans (FHA)
FHA loans are multifamily investment property loans offered by traditional lenders and mortgage brokers that are backed by the FHA. These loans can be used to buy multifamily properties, and require you to live in the property for at least one year.
Pros: Unlike conventional loans, FHA loans require a down payment of around 3.5%. additionally, they have lower credit score requirements which makes them easier to qualify for.
Cons: FHA loans require you to live in the property for at least a year, and this may not be convenient for certain investors. Additionally, FHA loans are usually not offered on properties that are in rough condition. Therefore, they likely won’t be approved for fix and flips.
Hard Money Loans
Hard money lenders are private investors or companies that issue short-term loans with your property as collateral.
Pros: hard money loans are easier to qualify for as the lender isn’t necessarily looking at your credit. They also tend to be approved very quickly.
Cons: lenders tend to charge higher rates and fees, which is why they’re more suitable for short-term fix and flip projects.
Home Equity Loans
Home equity loans are an option for investors who want to make use of equity they currently have in their home to invest in a property flip, but don’t want to touch their primary mortgage. When it comes to borrowing against your equity, there are usually two options. You can either take out a one-time lump sum loan at a fixed interest rate, or use a home equity line of credit (HELOC). With a HELOC, an investor can tap into the equity of their home whenever they want to up the pre-set loan limit.
Pros: In most cases, your loan is tax-deductible which lowers your total tax expense liability, and the interest rates can be lower than other types of loans.
Cons: You risk losing the property if you can’t repay the loan.
Using loans to invest in real estate can be tricky if you are unsure of how to secure financing. Luckily, there are options out there for you. Investors looking for a good return on investment should take time to do their research, and carefully select a lender that is going to work with them throughout the entire process.
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners throughout the country. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next real estate investment.