There are countless perks associated with owning an investment property and fortunately for you, there are many ways you can invest in them.
Purchasing an investment property is a great way to diversify your portfolio, whether you’re doing it to create a passive income by renting it out, buying and holding the land for future development, or flipping the property.
Property investment, unlike many other investment trends and markets such as stock or crypto, requires a significant start-up cost.
So it’s vital that you do your research and secure the right financing for your investment property, so here’s how you can do it.
Investment Property Loan Options
Right off the bat, it’s a good idea to look at the several forms and options of investment property loans or financing and the criteria you need to apply for one. Below is a list of your main options.
Conventional Loans: With a conventional loan, your credit history and personal credit score will determine if you get approved and what interest rate applies to the mortgage. These are the only standard loan programs and don’t have any unconventional requirements that government-backed mortgages have.
Hard Money Loans: Hard money loans are ideally suited for fixing and flipping investors that know they can pay it off quickly as opposed to buying and holding property or renting it.
FHA Loans: With a mortgage backed by the Federal Housing Administration (FHA), you can purchase a two to four-unit property and collect rent on the other units. To be eligible, you have to show a recorded history that you’ve lived in one of the units for at least one year.
VA Joint Loans: The US Department of Veterans Affairs (VA) multifamily loan program allows eligible military borrowers to buy a property of up to seven units, but only if they live in one of the units.
Non-QM Loans: If you don’t qualify for any of the loan programs above, you may be eligible for a Non-Qualified Mortgage (non-QM) loan that is based strictly on the received rental income from the property. They usually have higher down payment requirements and interest rates.
How to Secure an Investment Property Loan
Each lender is going to have varying requirements. Some might require a hot real estate market, while others might rely on income and credit scores. But generally, there are a few steps every mortgage process includes:
1. Find a Lender
Most lenders will offer a variety of investment property loan options but their rates will also significantly vary from other lenders. Ask your real estate agent or other investors for recommendations. You should also look for insurance, just like you would if you lost car keys, it can prevent you from losing a lot of money.
2. Fill Out the Loan Application
Once you’ve decided on a lender, you must fill out a loan application. If it’s for a standard loan program, the process will be generally the same as other loans. But if you’re applying for hard money or a non-QM loan, the lenders will have their own application system.
3. Provide Documentation of Your Assets
You need to have current leases and rental info on the property you’re purchasing and at least a two-month bank statement.
4. Conduct an Investment Appraisal
You will then need to pay for a home appraisal, which gives you a report detailing the average rent collected on similar homes in the neighborhood. This can help you qualify for the loan.
5. Review the Closing Disclosure
After the appraisal is completed and the conditions are met, the lender will issue a closing disclosure, three business days before closing. Make sure to review it and see if the figures are what you expected.