Real Estate Investing &
Investment Property Loans

What Is Real Estate Investing?

Real Estate Investing, investment property loan

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.

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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:

Vacation

Pros:

  • 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

Cons:

  • 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

College

Pros

  • 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.

Cons

  • 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

Long-term

Pros

  • 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

Cons

  • 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.

Flip

Pros

  • 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

Cons

  • 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. 

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