In Part 5 of how to get started in Baton Rouge Property Investing I will be discussing various means potential investors can secure the funds necessary to buy investment property. This is meant to be a general discussion for educational purposes and not an endorsement of any particular course of action.
One thing to keep in mind is an investment property will be non-owner occupied for the most part. There are advantageous ways to purchase properties with 2 – 4 units where the owner occupies one of the units but I will be talking mostly about single family residences occupied by tenants.
One of the first questions I receive from potential investors is, “Where do I get the money?” This is of course the main barrier that most people have when it comes to purchasing real estate. You need to look at this as a different process than the home loan process for a home you will occupy. Not every bank will even entertain making a loan on investment property so you will need to explore other sources.
Borrowing from friends, family or other private money sources is an option for some. These loans usually have more flexible terms than many other options and lower interest rates than what are known as “hard money” loans.
Hard money loans have some advantages in that they don’t have to be approved by a sometimes cumbersome home review committee put in place by many banks. The loan approval is based on you, the deal you have in mind and the judgement of the lender. They are secured most often by the home that you want to purchase with the loan amount based on a percentage of the value of the asset after improvements have been mad, commonly, 65-70%. Interest rates are much higher than the 30 year home mortgage rate, so there may be some sticker shock. The repayment terms of these loans are shorter than 30 or 15 years.
I spoke with Lynn Sharer, Senior Loan Officer with Assurance Financial in Baton Rouge, LA, about the ways a mortgage banker can help people who want to purchase investment property. For situations where the home does not require more than $6,000 worth of repairs, Lynn says that a buyer can put down a minimum of 15% of the value of the home, finance for 10-30 years and pay only about .5% more in interest than a home they would occupy. The loan process for an investment property purchased in this manner has similar requirements to an owner occupied home.
Another great opportunity offered by Assurance Financial is financing the sale of a duplex or fourplex. When the buyer moves in one of the units, they become eligible for a FHA loan and can put as little as 3.5% down. Lynn also talked about using a “cash-out” refinance of your existing home to generate cash to purchase the investment property. There are no restrictions on the amount of work that a property needs and the only limit is how much equity you have in your home. You could borrow up to 80% of the equity in your home.
One of the most flexible ways to purchase an investment property is by using a home equity line of credit (HELOC). This is similar to the “cash-out” refinance in that it is tied to the value of your home but the advantage is that you can make interest only payments or pay off the whole amount if you choose.
Buyers with 401(k)s or other investment accounts can borrow against these assets or liquidate them to buy investment properties. There may be some tax consequences to this so research it thoroughly before you do this.
Thanks to Lynn Sharer (firstname.lastname@example.org ), senior loan officer with Assurance Financial for her help in writing this post and as always if you need help with your real estate investments, I can be reached at email@example.com .