The
Many Types of Real Estate Investment Loans
When it comes to
real estate investment, very few people are able to buy houses outright with their
own money. And in this age of double digit yearly returns in the real estate industry,
combined with low interest rates on mortgages,
it may not even make sense for a person to tie his own money up in the deal given
the spread between the two rates of return. That is where a number of different
types of real estate investment loans come into play.
The most common type
of real estate investment loan is a bank mortgage. Usually provided by a bank,
this loan type is generally financed out over a period of 15 to 30 years, although
in some cases, terms of up to 50 years have been established. There are strict
rules and regulations regarding the issuance of a mortgage, and banks will most
always go through the same ritual of buyer prequalification, appraisal of the
home, the purchase of various types of insurance such as title insurance, and
a closing period that lasts around a month, give or take a few weeks. With a mortgage
for an investment property, the terms are usually a bit different because it is
not the buyer's primary home. Banks figure that there will be a bigger chance
for default on the loan if the person doesn't actually need the home for his own
personal shelter, so interest rates are typically a point or two higher on loans
for investment properties. Also, the prequalification process is stricter for
a real estate investment
loan, as a higher level of wealth is needed to sustain not only the buyer's
personal home, but the additional property as well. Finally, more of a down payment
is usually required on an investment property when compared to a mortgage on the
investor's primary home, to show the buyer's commitment to the investment and
to protect the bank's interest in the deal.
Another type of real estate
investment loan is a non-traditional loan that is made through a private mortgage
broker, usually for a fixer-upper house that is going to be rehabilitated and
then resold shortly thereafter. If you've seen those late night commercials detailing
the way to make money in real estate by rehabbing houses, this type of loan is
one piece of the puzzle. Private mortgage lenders with money they'd like to invest
will often put up the money for an investor to buy a house that is in need of
some cosmetic repairs. The object is for the investor to buy the house at a level
substantially below the market value from a buyer who is desperate to rid himself
of the property. Houses like this typically won't qualify for a traditional mortgage
because of their disrepair, so that is where the private loan comes into play.
The terms are typically different than those of a traditional mortgage, with a
set interest rate for a few months or a year, and then a balloon payment due at
the end of the rehabilitation period when the house is to be sold. The lender
makes a few months worth of interest, and the investor has a cheap source of funds
while he rehabs the house for resale.
