Real Estate Investing &
Investment Property Loans
What Is Real Estate Investing?
Real estate investing involves purchasing an investment property to generate profit. An investment property is real estate that isn't a primary or secondary residence. It's a piece of property that will not be occupied by the owner. Instead, the property is purchased in order to generate a profit, either through rental income, a future sale, or both. A home buyer may be interested in investing in real estate due to potential tax benefits or the opportunity to build up an investment portfolio.
An investment property can be a long-term commitment or a short-term endeavor, such as "house flipping", where a home is purchased, renovated, and then sold at a profit. Regardless of the specifics, the needs of real estate investors are different from the needs of a typical home buyer, so working with a lender who understands your goals is beneficial.
Why Get an Investment Property Loan?
Whether a borrower plans to purchase a single-family home, townhouse, condominium, or multi-family dwelling, there are different requirements to secure a loan on an investment property versus obtaining a mortgage for residential purposes. Since investment properties inherently carry more risk, the financing guidelines are different from traditional loans - they also offer additional benefits:
- Rental opportunity: Renting out your property to tenants creates additional cash flow. Consider purchasing properties near downtown areas, vacation spots or college campuses as these are popular among renters.
- Increased cash flow: Your investment property can provide income to offset your expenses. You may even profit from your rental property!
- Potential tax benefits: There can be many tax advantages to owning rental properties, such as deductions for mortgage interest, property and real estate taxes. Be sure to consult a tax adviser.
- Build your investment portfolio: You can diversify your portfolio by owning an investment property.
Real Estate Investing: Types of Properties
If you’re considering real estate investing and an investment property loan, here are a few different property types and the pros and cons for purchasing and maintaining them:
- Beach or ski rentals can yield the equivalent of a month’s long-term rent in a week.
- Vacation rental services can supplement and even a few nights a month can add up to the mortgage being covered
- You can use when you wish
- Popular areas can be very expensive
- Frequent turnover means you need to be an active landlord
- More tenants heighten risk for damage
- May sit vacant off season
- Almost always a demand
- High rents because college-owned competition charges top dollar
- Rental market is calculated with each individual tenant’s share compared against dorm or college-owned apartment rates (as opposed to one rate for entire property)
- The area markets itself
- You can have property do double duty if you buy where your children plan to attend school
- Rent short term during summer or off season for orientation, summer school, sports competitions, etc.
- Frequent turnover; 8 – 9-month leases standard
- Risk of damage, noise complaints, repairs, tenant conflicts
- “Off season” may cause vacancies, but high rents during year should compensate
- Steady tenants, sometimes for years, allow you to know and trust who is caring for your home and build equity
- Low turnover can help you anticipate repairs (tenants have proven they won’t damage property, but regular upkeep will still be necessary)
- It can be a “passive investment.” If management company is utilized, it can handle all leasing, tenant interactions and repairs.
- Track market and sell when it’s most advantageous
- Monthly rents won’t be as high as vacation or college rentals
- It’s a recommended business practice that rents for long-term tenants should cover your mortgage, repairs, and other expenses including HOA. A landlord who doesn’t maintain property or raises rents at every opportunity will get a bad reputation in the region.
- Decent money can be made in a short amount of time
- If you can sell fast enough, you may only have one or two mortgage payments
- High level of personal satisfaction and creative release involved with rehabbing a house
- It’s a lot of work and there can be unforeseen, costly expenses and repairs
- If you can’t sell quickly, you risk your profit and may have to pay mortgage longer than anticipated
- You should know the market, area, and home repair very well to succeed
It’s still a great time to get into the real estate investing realm. The returns can be significant and the experience, rewarding.
Talk to us about a cash out refinance on your current home to buy an investment property.