Are you looking for a smart way to start a passive income stream? Owning and managing rental properties is a wonderful method to make some extra cash while building up an impressive portfolio. However, we all have to start somewhere, and that often includes talking to a bank before purchasing your first rental. Below, we’re discussing a few different types of investment property loans to consider.
A conventional loan is the same type of mortgage many people use to buy the home they live in. In this case, investors should be prepared to have fairly good credit and a down payment of at least 20 percent. The minimum required credit score is typically a 620, but those with a 740 or higher can usually expect the best interest rate terms.
Hard Money Loans
Another option for financing a rental property is a hard money loan. This doesn’t come from a bank, but rather a company that specifically invests in real estate properties. Instead of looking at your credit score, these organizations will take into account the property and its profitability. Keep in mind, however, that these loans are considered short-term, with most not exceeding 36 months.
Private Money Loans
If you’re having trouble securing a loan from the bank, private money loans might be an ideal option. These loans are funded by people who have a little extra money and want to invest in real estate. However, private money loans often come with a handful of formalities. For example, if a payment isn’t made, the private party could foreclose on the property.
Fix-and-flip loans are usually optimal if you are interested in purchasing a property but want to renovate and sell it instead of renting to tenants. Hard money lenders and private money loans often engage in this type of business, but, again, they come with numerous stipulations that need to be considered.
Home Equity Loans
Do you currently own a home and have a considerable amount of equity built up? Consider taking out a home equity loan and using those funds to purchase your first investment property. After you have reoccurring monthly rent payments or sell the property in a fix-and-flip scenario, you can easily pay off your loan. While it isn’t exactly a savvy idea for those who are trying to get out of debt, it’s an option that should be considered.
Commercial Investment Property Loans
Commercial investment property loans are available for those who want to invest in business buildings or other commercial properties instead of residential units. These loans are slightly harder to secure; however, it’s still possible if you have an appropriate down payment and a high credit score.
Choosing the Right Type of Loan
Purchasing an investment property is no small decision. Therefore, it’s best to take plenty of time to research and plan before choosing which type of financing you’ll pursue. At the end of the day, it’s crucial to find a loan package that meets your unique needs.