buying a home with little money in savings

Which Type Of Loan Product Is The Best For An Investment Property?

by Fernando Moore

Investing in real estate is a good way to make money. Unless you have a lot of cash on hand, though, you will need to secure a loan to finance the purchase of property. However, there are a few different loans available for investment purposes, and the best one for you depends on your financial goals. Here's what you need to know about these loans to help you pick the right one for your situation.

Construction Loans

If you want to make money by purchasing homes during the construction phase and selling the completed properties to hungry buyers, you will need to obtain construction loans to finance your purchases. These are essentially unsecured loans, because there is no collateral yet to guarantee it since the home is in the process of being built.

As a result, these loans are more difficult to obtain. You must have excellent credit, a good banking history, and be able to prove you can make the minimum payments (typically interest only). Additionally, the funds are usually placed in a draw-down account where you take out only as much as you need to pay the contractor for that stage of the building, and the bank will send someone at regular intervals to check on the home's progress.

Beware, though, you need to be sure you'll be able to sell the home fast and make enough on the sale after it's built to cover the cost of the loan; otherwise, you may end up losing money for each month you have to continue carrying the mortgage.

Fix and Flip

In general, banks don't like short-term loans because they don't make as much money from them. However, Fix and Flip loans are designed for home flippers who purchase distressed properties, renovate them, and then sell them fast for profit.

These loans are easier to obtain because the home serves as collateral for the loan. Because of the shorten loan terms, though, you will pay a higher interest rate than you would for a traditional mortgage: anywhere from 7 to 12 percent. However, this is only a concern if you end up holding onto the property for longer than you intended.

In addition to selling fast, you need to carefully budget your renovations to ensure you'll make a profit when you sell the home. Be sure to research the market prior to investing in the property to determine whether the property value will increase enough to cover your costs and profit margin.

For more information about financing your investment properties or assistance with finding homes to buy, contact a real estate agent.