Tips for Financing Investment Properties
Real estate investing is one of the most lucrative investment activities you can participate in. Many investors will take full advantage of the benefit associated with leveraging their investments by using real estate loans for their purchase. However, these loans can directly impact your return on investment with income-producing rental properties. With this in mind, it is important to follow a few key tips when choosing your investments and setting up your loans.
Understanding the Benefits of Real Estate Investing
With many types of investments you make, such as buying stocks, mutual funds and more, you must pay 100 percent of the investment price up-front. With real estate, you can leverage the purchase with a real estate loan. For example, you may obtain a 75 percent investor loan on a residential property, and this means that you only have to contribute 25 percent of the value of the investment. However, your equity rate of growth, property value appreciation and more will grow based on the full value. More than that, on rental properties, your tenants will essentially pay the mortgage payment for you. This means that they are contributing to your total investment purchase over time. These are benefits that are simply not possible through most other forms of investments, and this is why real estate continues to be a great investment option to consider.
What to Look For in Real Estate Loans
If you have decided to leverage your purchase of investment properties, you need to focus on a few factors when searching for loans. First, focus on the loan-to-value. Banks typically want investors to make at least a 25 percent down payment on an investor property, but this varies by property type, loan amount and market. Use a mortgage payment calculator to estimate the monthly payment of a specific property you are considering, and crunch the numbers to ensure that the property will cash flow sufficiently for your monthly needs at the loan amount you desire. If not, consider making a larger down payment or searching for a different property. In addition, pay attention to the interest rate and term on the loan. These will impact your monthly payment as well as equity growth. Cash flow investors generally want a longer term while equity investors typically want a shorter term to pay the property off quickly.
Ensuring That Your Financial Goals Are Met
Because financing on your investments will play a considerable role in your overall return, you must select your investments with care. Always obtain current rental information, lease start and end dates, operating history and more on the properties you are interested in. Ensure that the property can generate enough income to support the loan you need or want. Crunching numbers up-front is critical if you want to make a smart investment decision.
Investing in real estate can be incredibly lucrative, but financing is often preferred or required. Put these tips to use as you choose your investment properties and set up the right loans for their purchase.
Eugene Schneur is a real estate mogul and the co-founder of Omni New York.