Investing is a tricky business. First, because there’s no such thing as a risk-free investment – anything you invest in has the potential to sink overnight. Second, because it often requires a lot of money most people don’t have lying around.
To minimize the risk of an investment, many people choose to go the real estate route instead of the stock market. After all, real estate investments offer a constant influx of money if you buy to rent, and properties rarely lose their value overnight. Even with properties that lose their value, owners still have a home they can use, meaning it’s impossible to lose all of your investment barring natural disasters.
The second part of investing, which is finding the money, can also be resolved. While finding financing for a second property is nowhere near as easy as for a first home, and with likely tougher terms, it is still possible. Still, there are a handful of possible options when looking for financing.
First Option: Conventional Bank Loans and Mortgages
The first option is, of course, the usual. Bank loans and mortgages are the leading go-to financing avenues when looking to buy your first home. If you already have a business relationship with your bank and a decent credit score, it might be worth it to look into this type of financing. In most places, you need to disclose if your property is an investment window, and if so, you’ll be offered less convenient terms.
Also, while mortgages for own homes can require as little as 5% down payment, investment properties have much harsher requirements. Some places will require up to a 20% down payment with steep interest rates that can be a disincentive.
Now, higher interest rates might look bad, but since you’re buying the property with the intent of making money from it, they might not be terrible either. A 15% interest rate annually can be considered terrible, but it isn’t anywhere as bad if you make up to 30% of the property value from rent income. As usual, when investing, properly studying the property you want to buy, its location and its potential must be paramount.
Second Option: Home Equity
A Home Equity loan, or second mortgage, can also be an investment property finance option. In it, you put your home as collateral in order to get a loan to finance your second home. The draw, of course, is that if you default you could lose both properties.
However, there are other pros. Some of these loans offer monthly payments consisting only of interests, meaning the monthly amount you need to pay back is minimal if things get rough. Also, they can offer differing amounts, and sometimes they allow you to draw from them – as you would from a credit card – as you need, paying interests only on the money you’ve drawn. This gives you flexibility, as the loan you get might be bigger than what you need, allowing you to have extra funds to tap into if necessary.
Third Option: Flip a Property
An interesting investment method that has become commonplace over the last decade is buying properties to flip them. This means buying a property, usually one that has somewhat fallen into disrepair, to renew or remodel it, then sell it at a much higher price.
Since this investment property finance method has become increasingly common, some people basically live off of flipping houses. Generally, interest rates between buying a house to live in and a house to rent vary wildly. If you intend to rent, they’re higher since the expectation is that you’ll earn a monthly income from it. Buying to flip, since it implies, you’ll only own the property for a short time, can have harsher interest rates – up to 18% – and often must be paid within a short time.
Besides the interest rates, many buy-to-flip loans require that the property itself be placed as collateral, which could mean trouble if the project goes wrong. However, buy-to-flip loans can be easier to get, since the main component lenders look for in these loans is property value. If they believe the house can be flipped, they’ll often agree, but if they see no potential in flipping it either due to the zone or because of housing prices going down, then they likely will refuse.
Fourth Option: Joint Ownership
This one is a simple one. You have savings, or perhaps a credit line, but it isn’t enough to allow you to buy that property you want to invest in. Your business partner is exactly in the same boat. Between you two, however, you have enough money to pay for the property. What’s the best way to get financing here?
The answer is financing each other, of course. Buying a property along with a partner can greatly reduce, or even eliminate, the amount of money you’ll owe. You’ll have to split any profits from the investment, of course, but earning half as much money a month isn’t too bad if you’re also investing half the money you otherwise would.
Now, joint ownership can be problematic. Just like business deals, it can test a friendship, and if the partnership is to break, the negotiations for what happens with the property can get difficult. Even if you paid half the price of the property, don’t expect its value to be divided 50/50 in case of a breakup. Your partner might well get lawyer-wise and demand more, arguing they’ve invested more in post-purchase fixes and improvements.
Still, if you are sure this won’t be the case – for example, if you already have a business partner you share joint custody of other projects with – this can be a great, simple way to find financing. It will also save you from having to deal with much paperwork or have a debt hanging above your head, pushing you to find new tenants for your rental, or buyers for your flip, before your lender starts charging you again.
In summary, investing in real estate is considered one of the safest economic moves a person can make. Still, many people shy from it since they don’t have enough saved to buy a property, and they wrongly believe nobody will help them with such an investment. From the above, investment property finance options can be explored to improve your earning power.