If you’re like most people, you’ve at least thought about owning multiple properties one day, but how do you know when you’re ready, and what kind of real estate investing loans are even available?
Will you need 20% down?
What level does your income need to be in order to qualify?
There's So Much To Know, Right?
These are all questions that, for some people, work as barriers to the lifestyle they would like to achieve; all just because they don’t know what they don’t know.
When the pathway to your goal (owning multiple properties) seems unclear, it can be easy to assume it’s just not for you. That’s exactly why I’ve started this series of articles on the basics of property investing.
The best way to learn anything is to break it down into easy to understand topics, so that’s exactly what we’re going to do. In this article (number one of this series on real estate investing) we’re going to get right to your burning question:
Can You Afford to Invest in Real Estate?
The answer to this is almost always yes in my book, and that’s because of the variety of real estate investment loans available today. From traditional loans to government-backed programs or private lenders, there are many ways to obtain financing. There’s even owner financing or assuming another person’s mortgage. We’ll cover these topics in another article.
Bottom line. You have options!
How Much Can You Afford?
In order to even consider real estate investing, we have to be clear on our financial parameters, right?
Wait. Not so fast.
The financial parameters (or the amount you can finance) could vary depending on what you’re going to do with the investment property.
Most common for new investors would be one of the following. These are the two most common types of real estate investing:
Investing in a Property to Fix-and-Flip
Lenders offer different types of loans for flipping houses and provide plenty of options to meet your specific needs. I work with banks, credit unions and other financial institutions that have excellent loans specifically for these short term situations.
Investing in Real Estate You Intend To Hold On To
This type of investment is generally used as a rental. The income from an annual tenant is used as a way to produce enough income to pay the mortgage, repairs, maintenance, taxes, and insurance —as well as provide a reasonable profit.
You can still sell the rental property sometime in the future, of course, but the intent here is to hold onto the property until you’ve built enough equity (or housing prices skyrocket) and it makes sense to sell.
For the sake of this article, which is about real estate investing loans, we’ll focus on the purchase of a property specifically to use as rental income.
Real Estate Investing Loans
Ok, back to the reason why we needed to establish the usage, or the way we plan to generate income from this investment property, as a first step.
All real estate investing loans are not created equal.
There are different financing options available for different investment situations.
Since this situation is a residential real estate purchase that you’re planning on holding onto for a while, let’s look at what some of the variables might be.
Is This Your First or Second Mortgage?
If you already own a home, you’re ahead of the game. Home ownership can open you up to several options when you’re looking at real estate investing loans. Most importantly, owning a home can save you from having to come up with cash for a down payment.
One option might be a HELOC or home equity loan. Your current home can be used to borrow the cash needed to fund a down payment. You can begin paying the loan back with rental income.
If you are not currently a homeowner, don’t worry! There are plenty of creative ways to get you into your first real estate investment.
If you’re ambitious, and don’t mind close neighbors, some first time investors have found multi-family units (especially in certain areas of Cape Coral, Florida) to be extremely lucrative.
Here’s a potential scenario:
A first time home buyer who wants to start generating income immediately could purchase a duplex or quad (4 family unit), live in one of the units and rent out the remaining units. In the ideal situation, the investor would be living rent free while enjoying the benefits of an FHA loan, which is technically not available for investment property, unless you happen to live on the property.
These are just a couple of scenarios that could potentially come into play as your real estate investing journey is unfolding. Every person is different, with different life goals, so what works for one may not be the right situation for another.
Before speaking with a potential lender, it’s important to have a clear picture (a business plan). For your own calculations, you just need to make sure you’re using realistic rental figures for the area as well as property tax and home insurance costs.
Factoring these properly will give you an idea of the potential a property has for producing income, and those numbers are taken into consideration by the lender as well.
For example, you may not think you’ll be approved for an investment property loan because of your income. Maybe you only have $1000 left at the end of every month to put away in savings, so the thought of a lender approving you for a $400,000 loan may seem completely out of reach; but is it?
Did you know, for example, that your lender will calculate up to 75% of the potential income from your investment property and add it to your annual income? Boom. You just qualified for the loan without increasing your income because the lender is going to use a the projected increase in your loan calculations.
*Of course, this situation is for example purposes only, and all information is subject to change over time. There seem to be seasons where mortgage approval qualifications are more stringent and seasons when they are, let’s say… “not so stringent.”
Real Estate Investing Loans - Know Your Options
I’m a real estate investor myself, and I work with first time home buyers and first time investors every day. It’s important to me to educate as many people as I can about the benefits of real estate investing, but when we’re talking about real estate investing loans, I always bring in the trusted relationships I have with area lenders and banks.
Real Estate Investing Loans - Calculate Your Financing Needs
Before committing to any loan, it’s important to calculate your exact financing needs. This will allow you to determine what type of loan is best suited for your real estate investment and how much money you need to borrow. Consider factors such as the total cost of acquisition, rehabilitation costs, anticipated rental income, and closing costs when calculating your financing needs.
Ask About Prepayment Penalties, Fees, and Other Costs
Many lenders and banks have additional costs like loan fees, prepayment penalties, and other hidden expenses. Make sure you ask about all costs associated with the loan before signing anything so you can calculate how much it will actually cost you in the end. You should also be aware of the potential tax implications of taking out an investment loan, as some may require you to pay taxes on any interest paid. Keep all this information in mind when considering and comparing different loans.
The best real estate investment is the one that most fits your personal situation, financial needs and investing goals.
If you have any questions or want to talk about investment options, I’m here to help!
Shelby Tompkins, Realtor®
Schooner Bay Realty
239-464-2278
