By: Evan Tarver, Fit Small Business
Updated: January 24, 2019
Real estate can be an attractive investment. However, since real estate investing is capital-intensive, not many people are able to take advantage. Luckily, for those interested in real estate investing, there are many different financing options available to investors of all types.
To help you get the best financing product for your next real estate investment, we outlined a few of the best options below. After you read our list, you should be able to identify the right loan for you. Remember, however, that each product has its own pros and cons, and you should always do your homework before applying for a loan.
Fix-and-flip loans are short-term hard money loans that help investors purchase, renovate, and sell an investment property. The typical term of a fix-and-flip loan is between one and three years. However, fix-and-flip investors usually use the loan to purchase and sell a property within three to twelve months. Fix-and-flip loans typically include purchase-only financing, as well as rehab loans.
Purchase-only loans are used by investors to finance the purchase of a property that doesn’t need to be renovated. This is usually the case if an investor needs to season a property or something similar before refinancing to a permanent mortgage at a later date. Rehab loans are used by investors to purchase and renovate a property before selling it or refinancing to a permanent loan.
HomeStyle Renovation Loans
HomeStyle Renovation loans are Fannie Mae-backed loans with the primary purpose of financing owner-occupied primary residences between one and four units. However, Homestyle Renovation loans are also available to investors who want to purchase and renovate a single-unit second home or investment property.
While this is a great option for investors looking for a smaller renovation project, investors who want an investment property with more than one unit should look elsewhere for financing. Further, Homestyle Renovation loans are permanent mortgages, and short-term investors may want to look elsewhere. This means that HomeStyle loans are best for new and existing buy-and-hold investors who want to purchase and renovate a single-unit property.
Multifamily loans are mortgages that can finance the purchase of a residential investment property between one and 5+ units. Apartment loans, like multifamily loans, can also finance the purchase of an investment property with five or more units. However, apartment loans typically can’t finance properties with one to four units because an “apartment building” is considered to be five or more units.
Multifamily and apartment loans can also be combined to give real estate investors different options when looking to finance a property with multiple units. Any investor looking for a multi-unit residential property should consider one of these two loans.
However, multifamily and apartment loans can typically only finance properties with a small amount of commercially zoned space. If an investor is looking to finance a mixed-use building or commercial building, these loans may not work.
Cash Out Refinance
A cash out refinance occurs when a real estate investor wants to unlock the equity in an existing investment property in order to purchase a new investment property. A cash out refinance is the act of taking out a new mortgage on an existing property, paying off any existing liens, and pocketing the difference in cash. That available cash is typically used as a down payment on a new investment property or even to purchase a new property with all cash.
The benefit of a cash out refinance is that mortgage lenders typically don’t have restrictions on what an investor does with the cash they pocket. This means that an investor can use a cash out refinance to purchase investment properties of almost any type.
The downside, however, is that an investor typically needs at least 30% or more in existing home equity in order for a cash out refinance to work. This is because mortgage lenders will usually only allow a cash out refinance between 65% to 80% of a property’s appraised value.
A blanket mortgage is a unique type of loan that finances multiple properties under a single mortgage. This means that investors can use a blanket mortgage to purchase two or more properties together as one. However, it’s common for lenders to only approve blanket mortgages for investors looking to finance five or more properties together under a single loan.
Blanket mortgages don’t have many restrictions on the types of properties financed. For example, while blanket mortgages usually require that properties are in good condition prior to financing, they can finance properties with one to five or more units. This means an investor can finance multiple multi-unit investment properties under a single loan.
Investors looking for a blanket mortgage will typically use it in one of two ways. The first is when an investor wants to purchase multiple new investment properties at once with a single down payment. The second is when an investor with multiple existing properties wants to refinance them together under a single loan.
There are many different financing options available to real estate investors. Don’t let the upfront capital requirements of buying investment properties scare you away. Instead, look into each of these loans. You don't have to stop there, either. While exploring what's available to you, look into these five additional options as well.
About Evan Tarver
Evan Tarver is a small business and investments writer for Fit Small Business, fiction author, and screenwriter with experience in finance and technology. When he isn't busy scheming his next business idea, you'll find Evan holed up in a coffee shop working on the next great American fiction story.