Whether you’re looking to purchase your first rental property or have been building your investment portfolio for a while, congratulations! Real estate can be a great tool in building a lifestyle that works for you and at Apex Virtual Accounting we are passionate about helping you. When it comes to purchasing rental properties, it is important to understand the financing options available to you. The list that follows is meant to provide you with a basic overview of some financing options you may be able to utilize when purchasing your investment property.
Conventional Loans
If you already own your own home, it’s likely that you’re already familiar with conventional loans. These are mortgage loans that are not backed by any government agency. As such, these loans often have stricter approval requirements. Banks, credit unions, and mortgage brokers (who work with a variety of lenders) can all offer conventional loans.
Non-Conventional Loans
Non-conventional loans are backed by a government agency such as the Federal Housing Administration (FHA) or Department of Veteran Affairs (VA). Typically the down payment and credit score requirements are lower than those of conventional loans. However, with FHA loans you must reside in the unit for at least one year. VA loans are only available to current service members, veterans, and eligible spouses and you must reside in one of the units.
Private Loans
Rather than obtaining lending through a bank or credit union, private loans are issued by either a small business or an individual. Often these loans are offered by experienced real estate investors and can have highly negotiable terms and fees.
Portfolio Loans
When you have individual mortgages on several different properties by the same lender, you have portfolio loans. Often, there is more customization when it comes to down payment, credit score, interest rate, and loan term. However, this flexibility in requirements can result in higher fees, prepayment penalties, and more.
Blanket Loans
When investors want to purchase and finance several properties under a single loan, this is known as a blanket loan. Interest rate, loan term, down payment, and credit score can sometimes be customized to the borrower’s needs. Important to note is with blanket loans, rental properties are cross-collateralized. However, you can request release clauses should you sell a property within the blanket loan.
Residential investor loans are similar to primary residence loans in term length, payment schedule, and rate structure. However, it is important to note that investor loans typically have higher interest rates, require higher down payments, and higher credit scores than primary residence loans.
Can you qualify for a primary residence loan?
Primary residence loans have better terms (lower interest rates and fees) than loans to purchase an investment property. If you want to qualify for a primary residence loan you can employ a couple of different strategies. First, you can buy the property as your primary residence and live in said property for at least one year before renting. Second, you can purchase a multifamily property (i.e., duplex) where you’re able to live in one unit while renting out the other. IMPORTANT: If you decide to take either of these approaches it is important that you read your mortgage contract carefully to ensure you aren’t in violation of any of the loan terms.
Final Thoughts
When it comes to making a decision about which type of financing is right for your situation consider the following questions:
What type of loan does this type of property qualify for?
What are your long term goals?
For example, you might qualify for a primary residence loan on a duplex or triplex property if you plan to occupy one unit, but once you have three or more units the underwriting restrictions will require higher down payments and interest rates. Properties with more than four units are considered commercial properties and are not eligible for conventional residential mortgages. If you are considering living in one of your units, you must decide if the space and location are practical for you. You will need to strike a balance based on your situation and determine the best investment strategy for your future.
We highly recommend consulting a mortgage broker or local lender in order to best understand the financing you qualify for. In addition to understanding your financing options, it is important to work with a professional tax advisor and accountant to ensure you are making the most of both your rental income and tax situation.
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