At its heart, real estate investing is simple. Buy a property. Fix the property. Rent or sell the property. But none of it is easy. All of it takes work. And all of it, even the selling, costs money. No step requires more capital than buying the property. Frustratingly, that can be the most challenging part.
Meeting investment property loan requirements can be tricky. Not every financial institution wants to lend money for these types of investments, for many reasons.
Don’t despair, though. There are ways to get real estate investment loans to kickstart your dreams. Meeting investment property loan requirements can be way easier than you thought or may have heard. When the first step is made easier, you’re that much closer to making your business work the way you want.
Why Meeting Investment Property Loan Requirements Can Be Tricky
It can seem like banks only lend to people who don’t need it—ones who show up with a spotless credit history and tons of ready cash. But when a real estate investor is looking for a loan, we’re often given a hard time. Do you want to know why? Well, there can be a number of reasons:
- Real estate investors often have spotty credit. We take out a lot of loans for multiple investments. And yet, even successful investors have trouble with credit.
- We don’t always have a lot of ready cash. If you are working on a few different deals, you might not have a ton of liquidity. Banks give much more weight to people who have a lot of cash.
- Traditional lending institutions think investments are risky.
The last reason is often the biggest impediment. You see a house and you may see possibility; traditional institutions see a risk that they may not be willing to take. Therefore, they may put several investment property loan requirements in place to mitigate the chance of risk. Many of these requirements can be hard to meet, but thankfully, there are other potential ways of getting the cash you need to strike a good deal.
Exploring Different Investment Property Loans
There are a lot of different ways to potentially get the loans you need to close a deal and meet the investment property loan requirements. Let’s take a look.
I know I said that banks and other old institutions are typically reluctant to give out loans for real estate investments, but if you have great credit and steady cash, you can secure a loan from a bank. This option can be much trickier if you still have a mortgage out on your primary property, or have multiple projects going at once.
- Depending on your history, you might not get very good rates.
- You’ll have to start paying it back quickly.
- The process can be slow and you need to act fast on a deal.
FHA 203k Loan
This type of loan is also known as a rehab or construction loan. Given out by the United States Federal Housing Administration, an FHA loan is designed for people who want to buy a property and fix it up. The loan covers a wide range of repairs and renovation, including kitchen and bathroom work, and can be used toward the cost of buying a house.
And, for the most part, your credit history doesn’t have to be spotless. You can get approved for a loan with a score as low as 580. In many ways, it seems designed for the investor. But there are some potential problems.
- The maximum loan is usually $31,000, which is helpful but might not go a long way when trying to buy a property.
- The paperwork can be challenging. It’s recommended you work with a professional or attorney to complete the paperwork.
- You aren’t allowed to perform what is considered “luxury renovations” (which includes removing a wall to make a bigger room.
- You have to live in the house for a set period of time, instead of selling it right away. This stipulation is one that many have to consider if their investment strategy involves “house hacking”.
Fannie Mae has always been an avenue for loans for investment properties. The availability of these loans spurs business and renewal. In the past, it wasn’t the easiest way to go about getting a loan, but a lot of investors found it reliable. Now, that’s changed.
- Government-sponsored enterprises (GSEs) like Fannie Mae are still under conservatorship, which makes them less likely to give out “risky loans”.
- They often fear real estate will be used for short-term rental businesses, so they monitor investment properties even more closely.
- In May of 2021, a new regulation went into effect to limit “second properties” to only 7% of their business. This means less money, and due to a focus on “high volume lenders”, there are fewer places to get loans. It’s become very complicated.
Loans don’t always have to come from a bank. There are a lot of private investors who want a piece of the real estate action. These could be wealthy individuals, investing clubs, or even friends and family. There are always places to turn when it comes to loans. But, as you might expect, it’s not exactly a no-strings-attached kind of situation.
- These lenders often want a LOT of say in how you are conducting business. They see themselves as partners with a stake in your business.
- They may require you to provide them with consistent updates, which can be frustrating.
- There’s more pressure when friends and family are involved. Not every project will turn out exactly the way you want, but trying to force a quick sale because Uncle Jim is wondering when he’s getting his money can be a disaster.
Hard Money Lenders
Hard money lenders—also known as private lenders—are a growing source of income for real estate investors. Why? Because they are lenders designed for real estate. Hard money loans, whether by an established company or a startup, are built to move fast and take chances. The lender looks at your history, the job, and the potential to determine the loan. And they know how quickly you have to act, which is why with many you can get the loan in as soon as a week. Then you have the cash to act fast.
The primary issue with hard money lenders is finding the one with the best rate.
- The terms and rates offered by each can vary, as does each lender’s criteria. Some value credit, some value job history, some look more at the project.
- Generally, you get better terms the more established you are, so it can be tricker for someone new to find the right lender.
- There are a lot of hard money lenders out there right now, so finding the right one can take a lot of work (and entering your information into every website is time-consuming).
Home Equity Line of Credit (HELOC)
This is a pretty cool financing option that lets you take out a line of credit based on the equity in the home you are living in and use it for just about anything. It’s not a lump sum. You can get a HELOC for $45,000, for example, and only pay interest on what you use. You have a set time to use it, and you don’t have to use it all. It can be convenient—but that can be one of its drawbacks.
- It’s tempting to use the money for non-investment purposes, which can damage your project’s success.
- The interest rate is adjustable, which means that the rate can potentially skyrocket (and it can potentially plummet too. But with interest rates being so low, there aren’t many directions for it to go).
- The bank owns part of your house. That’s a lot of pressure for your investment deal to go as planned.
- When the draw period ends, the payments can double overnight. That can be a shock to any budget.
To me, the easiest way to get loans is to find a lender who understands your business and adjusts their requirements accordingly—a hard money lender. Now, it can be difficult to find a lender who suits your needs, so it’s best to use the proper tools and resources.
The Easiest Way To Find a Hard Money Lender
As I mentioned earlier, hard money loans are built for people like you and me. But in the past, finding the best one was never easy. I always found it pretty frustrating and maddening. I used to think that the more sites I could find, the better my chance to get a hard money loan. I would spend hours going from website to website entering in my information. It could go on forever. That changed when I invested in an independently owned and operated HomeVestors® franchise and began using their hard money tool.
HomeVestors created a proprietary hard money lender portal that is accessible only to franchisees. What does it do? It gives me access to a select group of nationwide hard money lenders. It’s really easy.
- I enter the details of my deal.
- Nearly instantly, I get offered rates from the whole network.
- I pick the one that is best for me.
Let me break it down for you: with HomeVestors®’s hard money lending tool, lenders are competing with each other for my business. It’s the best way I’ve found to get approval and meet investment property loan requirements. It can be fast, easy, and is designed to make my business better.
If you’re ready for hard money lenders to compete over you, request information about becoming a franchisee today.
Each franchise office is independently owned and operated.