Tuesday, September 26, 2023

7 Popular Types of Loans for Investment Properties to Consider

It’s said that the most reliable wealth creator on the planet is real estate. To that end, the global real estate market is worth 9 trillion dollars, some of which we’re sure you’d like to get your hands on since you’re reading this post.

Before you can claim your riches though, you’re going to need a loan to obtain your first property (unless of course, you’re flush with cash). Therein lies the purpose of this post on types of loans for investment property.

While there is some overlap when it comes to commercial investment versus residential investment, you’ll find the different types of loans available for either pathway vary to a degree.

Keep reading to discover those differences and more so you can loan shop confidently.

  1. FHA

An FHA (Federal Housing Administration) loan is a popular one among first-time home buyers. That’s because the down payment is low (right around 3.5%) and there’s a myth that it’s a loan that is specifically for people buying their first residence.

Let’s be clear, no rule restricts your FHA loan usage to your first house and FHA loans can be used on commercial ventures.

While FHA is not available on homes that are classified as “commercial properties” (5+ units), if you were to buy a quad-plex (which qualifies as residential), live in one of the units for 1-yr, and rent out the rest, you’d be able to use FHA money.

FHA use will be restricted on high-cost properties so start asking lenders “what is a jumbo loan” if you’d like to learn more about securing pricey investments.

  1. Conventional Conforming

Conventional loans are your standard 20% to 25% down products that your lender will resell to the federal government. You might be thinking to yourself, “25%! Conventional conforming loans that aren’t FHA are usually suggested to me at 20%.”

In the commercial arena, the down-payment threshold is a little bit higher than the traditional 20% target you’d want to hit with purely residential properties.

Within conventional loans, you’ll find a fixed interest and variable interest products. Fixed-rates keep your rate the same throughout the life of your loan. Variable rates change based on economic circumstances and are always initially offered at a lower rate than their fixed-interest counterparts.

  1. Portfolio Loan

Have an unconventional investment idea that your bank won’t be able to sell to the government? While it might be harder to obtain a lender on your deal (lenders love reselling their loans to the government) some do have protocols in place to accommodate you.

Loans that don’t conform to government standards are sometimes called “portfolio loans” as these are loans your bank will keep on their books.

Since banks are reselling these loans, they can essentially approve whatever kind of deal they’d like, although, don’t expect for a second that they won’t be scrupulous.

Portfolio loans can sometimes be offered with much lower down payments and are great for fixer-upper properties.

  1. Interest Only Loans

Interest-only loans can be both conforming and non-conforming. The idea behind this loan type is that you won’t have to pay principal over the life of your loan, just the bank’s interest fee.

This will reduce your monthly obligations substantially but there’s a catch. Once your loan matures, you’ll have to pay all of your backed-up principal expenses in one swoop. That’s going to be a lot of money so you’d better have it saved up.

Interest-only loans, given the risk the bank is taking on that they won’t get their principal, are offered typically to very well-qualified buyers.

  1. Hard Money Loans

Whether you’re looking for a residential investment play or a commercial one, you should know a thing or two about hard money loans. Hard money is offered by private lenders. These lenders are not all that scrupulous and will back risky real estate ventures with a catch…

They want their money back quickly (usually in under a year) and they’re going to charge you a lot of interest 10%+.

Given the cost and speed in which hard money needs to be paid back, these loans are suited only to get an investment property off the ground before refinancing your loan.

  1. USDA Loan

Many investment seekers aren’t aware of the USDA loan program but should be. That’s because the USDA offers pathways for investors to offer as little as 5% down in some cases, even on commercial properties.

There are, of course, strings attached to that deal.

The USDA only will back investments in small towns that are looking for injections of life (think 50,000 people or less). Also, the USDA will have certain requirements related to rehabbing the property you’re buying and will cap your rent rates if you’re planning on land-lording.

  1. Renovation Loans

Renovation lending is a types of loans for investment property option that can be obtained for investment ventures through the government or portfolio lenders. The idea here is that you’ll bake renovation costs into your loan amount and pay that down alongside your property’s interest and principal.

Government-backed renovation loans can get tricky to manage so build great relationships with your lender so they’ll be willing to work out that deal for you.

You Now Know the Various Types of Loans for Investment Property

Knowing the different types of loans for investment property empowers you to tackle your commercial or residential real estate ambitions with the capital you need to get things done. We hope you use that empowerment to your advantage and start doing deals.

A few deals each year and 10 years from now, you may be ready to retire!

For more insight on the best types of mortgage loans, more creative types of loans to buy a house, and more, explore the newest content we have available on our blog.