6 Types of Real Estate Investment Property Loans

What type of loan is best for investment property? Obviously, the least expensive interest rate is the overall best type of real estate investment property loans. However, the amount of down payment and the term length of the loan are the other major considerations. In the end, the best investment property loan is the one you can qualify for and make a profit.

Real estate investment property loans: SBA 504 loans, SBA 7 (a) loans, home equity investment loans, private money loans, hard money loans, conventional property loans

I have personally bought and sold vacant land, duplexes and single-family homes. Each was a unique experience and financing was the key to making each of them profitable.

Being young and a brand-new realtor, I literally started with no income. I used all of the cash I had to buy a duplex that broke even each month. That is, until I had to evict a tenant and put on a new roof. I sold that duplex a year after purchasing and netted $15,000 in profit. Eventually I failed as a realtor but continued to make profits in real estate investment property.

There are many ways to make money with investment property. However, you need to know what you are doing, and be able to survive when things don’t go as planned. Having enough money to do a deal is important but having additional funds to cover unexpected expenses is a necessity. Don’t know where to start? Here are five real estate loan types to consider:

SBA Investment Property Loans

The U. S. Small Business Administration (SBA) has several options for real estate investment property loans. The most popular and useful SBA real estate loans are the SBA 504 and SBA 7 (a) loan programs.

SBA 504 Loans

These loans can be used for:

  • Buying land
  • Buying land and construction of a building
  • Construction on property you already own
  • Buying existing buildings
  • Renovating existing buildings
  • Buying equipment
$100 dollar bills folded into the shape of a house.

SBA loans are only available for “for profit” businesses – that means you! SBA 504 Loans are used for buying real estate or major equipment purchases. These loans have excellent interest rates which are currently between 3.5% and 6% and you can get loan terms of up to 25 years.

To get an SBA 504 loan your lender must work with a local non-profit Certified Development Company (CDC) which is promoting community economic development where you are located. The CDC’s goal is to increase business activity and create more jobs. So, you will have a better chance of getting investment property loans if you can provide those benefits.

Your CDC approved lender will be loaning 50% of the total loan amount and the CDC will provide 40% of the loan. Which means that you must provide a 10% down payment. The interest rate for the lender provided loan may be different than the CDC loan interest rate.

SBA 7 (a) Loan

For loans less than seven years long the interest rates are from prime + 2.25% to prime + 4.25% and loans over seven years long from prime + 2.75% to prime + 4.75%

SBA 7 (a) Loans can be used for almost any purpose not just real estate investment property loans.

Traditional Conventional Real Estate Loans

This is what you typically think of as bank mortgage loans. However, there are many online lenders that may be a much better source for investment loans.

Loan approvals are based upon personal financial histories and the down payment amount which can be 20% but 30% is very common.

Four houses with white fences. Pulling equity out of your house is one way to get investment property loans.

Home Equity Investment Loans

Equity is the appraised value minus the amount still owed on the mortgage. You could refinance the mortgage and “cash out” or get a second mortgage for a portion of the available equity. Here again the lender will require that you retain 20-30% of the equity as a “down payment”. Discuss the various options with your lender.

Private Money Loans

This is where a single investor or group of investors combine their money to offer an investment property loan. Private money lenders compete with the banks by offering loans that banks would turn down. However, their interest rates are probably higher. Although their other loan requirements can be easier to qualify for.

Hard Money Loans for Property Investors

Often times these loans are used to rehab of “flip” houses. The lender is a private person or a company that requires collateral to secure the loan. If the property to be purchased doesn’t provide enough collateral, additional collateral will be needed.

Typically, these investment property loans are for just one year. However, these loans could be as long as 2-5 years. Also, expect high interest rates. You can’t get these loans from a bank because they are generally highly risky.

Think about this for a minute. You are a property investor by buying and selling or buying and renting. Whereas hard money loan lenders are also property investors that probably made enough money doing what you are now doing to be able to lend money. They have been through all of the problems you are likely to ever fight through. They understand the risks you are taking and know they can still make a profit if you default on the loan. Some day you may want to be one of them.

Final Thoughts on Investment Property Loans

When I first started out investing in real estate, I was willing to take a smaller potential profit. Which increased my risk and the difficulty in getting an investment property loan. That means passing by some tempting deals instead of waiting and find that golden opportunity that the lenders feel safe to lend money on.

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