By Chris Moreno, CEO and founder of GoKapital, a real estate and business loan marketplace.
Whether you are applying for a loan to buy or refinance your real estate investment property, the two most common options are through conventional financial institutions (banks, credit unions, etc.) or private mortgages (with funds provided by individuals or legal). bank lending companies). Both options have their own advantages and disadvantages. That said, within these two sources of real estate financing, there are also different types of real estate loans for commercial or residential investment properties.
In a general sense, a conventional home loan will offer competitive rates and a lower down payment. However, there is a caveat. The required qualification criteria will tend to be more stringent and the approval process will be longer (1-3 months).
Privately owned lenders, on the other hand, will often be more flexible in terms of approving potential borrowers. To mitigate this risk, your rates and down payment requirements will generally be higher. In either scenario, the main factors taken into account include your credit history/score, investment experience, asset characteristics and cash flow. The ultimate goal of a lender is to determine if a borrower can demonstrate the ability to repay a loan.
Types of real estate investment loans
Conventional real estate loans are usually offered by banks and credit unions. They are the most common types of mortgages in the United States and have different loan structures depending on your needs. For example, they may offer 30-year fixed-rate loans (meaning the interest doesn’t change over the life of the loan) or what’s known as an adjustable-rate mortgage (ARM). which will be adjusted according to market conditions after a predetermined amount of time (every 6 months for example). Fixed rate mortgage loans will generally be offered with terms of 15, 20 and 30 years. Given current market conditions, conventional mortgages for investment properties currently have rates ranging from 7% to 9%. Advantages include lower down payments and lower closing costs. These types of loans are ideal for potential borrowers with a strong credit history, solid finances, and enough time to complete a transaction (more than a month). It’s also worth keeping in mind that conventional loan rates will be higher for investment properties than for primary residential properties.
Private Mortgages/Hard Money Loans:
Private lenders do not have the same level of requirements as conventional lenders: they are more flexible and have a faster and easier approval process. With these benefits, however, there are other aspects to consider. Hard money lenders mitigate the risk of providing minimal documentation financing to borrowers with less than ideal credit histories by considering higher interest rates, shorter loan terms and higher closing costs. These hard money/private loans are offered by non-bank financial institutions, individuals, or even the seller of a property (known as “seller financing”). Most hard money loans will be structured with the borrower as a corporate entity, usually a Limited Liability Company (“LLC”), to expedite the foreclosure process in the event of default.
Types of real estate investment properties
Residential and Commercial Real Estate
Another important aspect of home loans is the type of asset class that is used as warranty, whether residential or commercial. In general, residential investment properties are purchased more frequently, resulting in relatively stable demand. These types of properties will have 1-4 units and will include single-family residences or apartments.
Once purchased, an investor will renovate the property and sell it for a higher amount (known as “fix and flip”) and make a profit, or the property can be rented out to tenants
d produce monthly income. For a “fix and replace” loan, loan terms are typically 1-3 years, with payments consisting of interest only (principal is returned once the property is supposed to be sold). For rental investment properties, terms are typically fully amortized with terms up to 30 years. Residential properties will also generally be priced lower than commercial properties and therefore may be a better option for new investors.
Commercial real estate includes warehouses, retail stores, office buildings, industrial properties, hotels, multi-unit buildings, and more. These types of properties will generally have higher market values than residential properties, depending on location. As an example, if we were to compare properties in Miami, FL, such as a 3-bedroom house and a multi-unit office building, the latter would likely have a higher value. In addition to requiring a larger financial investment, finding the ideal commercial real estate lender is another important aspect of structuring the transaction, as some lenders may have restrictions on providing financing for certain commercial properties.
While these types of properties can be a bit more complex in terms of getting a loan, there are several benefits. In terms of generating passive income, investing in commercial real estate generally produces a more stable income stream (since commercial leases tend to last 3 years or more). When evaluating the economic viability of a commercial real estate transaction, there may be more metrics to evaluate compared to residential properties. The importance of performing proper due diligence to analyze the income, expenses and net operating income of the property are vital.
me in ensuring that your investment is profitable. If you need quick capital or don’t qualify for bank financing, a private bridging loan may be the best option. On the other hand, if the commercial property is financially sound, as is the borrower, a conventional loan is probably the ideal option.