6 Best Investment Property Loans of 2021
Did you know that individual investors account for 74.4% of rental properties? If you want to start investing in property, you could join the many individual investors that are taking on the industry.
There are plenty of benefits of investing in real estate. If you don't have the funds to make this move on your own, you'll need to understand the different investment property loans.
With many options to choose from, how do you know which is right for your situation? Read on to learn about each of them.
1. Conventional mortgage loans
In 2021, many investors chose conventional mortgage loans to invest in rental property. These long-term loans are found through traditional lenders like credit unions and banks.
One downside is that they aren't guaranteed by the federal government. However, if you do receive one of these investment property loans, you can benefit from low-interest rates and other fees.
This year, due to the COVID-19 pandemic, mortgage rates were lowered and are expected to stay low to finish out the year. Investors who opt for this type of loan will have lower monthly mortgage payments.
To get the best investment property loan rates through a conventional mortgage, you'll need to qualify for the strict requirements. For example, you'll need to have a certain credit score and income to receive this loan.
Those without a steady flow of income or who are having trouble finding a job won't have the best chances to qualify for a mortgage. You'll also need to afford the down payment which is at least 20% of the sales price.
2. Federal housing authority (FHA) loans
If you are seeking an investment property for the first time and don't qualify for a traditional mortgage loan, you could consider an FHA loan. Unlike a conventional mortgage loan, these are backed by the government.
Those looking for a loan that is more lenient with its requirements will be glad to know that down payment and credit score requirements aren't as strict for an FHA loan.
Yet, this rental property investment method comes with some rules. You can only qualify for this type of loan to purchase a 2-4 unit multifamily property. You'll also have to occupy one of the units for at least 12 months.
For many, this is a small price to pay for receiving the many benefits of an FHA loan.
3. Home equity loans and home equity lines of credit (HELOC)
When learning how to invest in property, you might come across home equity loans and home equity lines of credit (HELOC) options. To make this method work, you'll need to own your current home.
COVID-19 has caused property values to soar meaning you can draw on the accumulated equity from your existing home to purchase an investment property.
In general, you can borrow up to 80% of your home's equity value. Taking advantage of this strategy in 2021 is key because we don't know what the future holds for real estate.
To turn your home equity into cash, you can use one of two options; a home equity loan or HELOC. A home equity loan provides the borrower with an upfront lump-sum payment with a fixed interest rate.
The second option, a HELOC, allows the borrower to use their home's equity whenever they need it. There will be a pre-set limit upfront so it works similar to a credit card. This method often comes with a variable interest rate, a downside for some.
4. Hard money loans
Hard money loans are not issued the same way as conventional mortgage loans. Instead of gaining a loan from a bank or credit union, an investor will seek out an individual or company.
One of the benefits of these types of investment property loans is that lenders base the amount they lend on collateral instead of credit and income. If you have issues with either, these loans are easier to apply for and qualify for.
Another advantage of this loan is that you can get approved in a matter of days. However, these pros come with some drawbacks.
Because this loan is riskier for a lender, they tend to be more expensive. You'll have to live with high-interest rates and additional fees.
The best way to use hard money loans is for short-term needs. Financially speaking, it doesn't make sense to use these loans for long-term rental payments which is why this loan is often used for flipping houses.
5. Private money loans
Private money loans often involve asking family and friends for short-term loans. This is not the best option for new real estate investors as you'll need a track record of success to get approved.
The benefits include being able to negotiate your own loan terms and fees which can make the overall payments cheaper. If things don't work and you default on your loan, you could lose a personal relationship with your lender.
6. Commercial investment property loans
If you are interested in investing in commercial property, some of the above loans won't work for you.
The main difference between a commercial investment property loan and residential property loans is that the borrower will need a business plan to secure funds. You'll also need a good credit score.
There are different types of commercial investment property loans, one being a hard money loan for short-term use. However, there are also long-term loans for commercial investment properties that you can look into.
Investment property loans: Which is right for you?
2021 has been a strange year thanks to COVID-19, but it has had a positive impact on the real estate industry. Now is the best time to invest in real estate as loan rates are cheaper and property values are rising.
With many investment property loans to choose from, you'll have to take a hard look at your finances to decide which is right for you. No matter what you choose, make sure you have the budget to make on-time payments.