Anyone who tries to convince you that you can make cash from passive investing should make you suspicious. Chances are they are trying to get you to sign up for their online course or join an expensive but useless program. The truth is that building a smart investment portfolio takes thought and strategy, research and experience. But, property investment can be made easier with advice and information from qualified professionals. You may not know it yet, but real estate financing can help.
Every successful real estate investor started small and worked their way up. Whether you want to profit from a vacation property or invest in a retail center, you’ll likely need financing to get started. Your broker is an important source of knowledge and information that is essential to making the right moves, especially if you are just starting out with your portfolio. In this article, we will cover some of the basics of using real estate financing to build your investment. For expert advice tailored to you, contact your dealer.
Second Home or Investment Property?
Looking to buy a second home or an investment property? How you refer to a structure makes a big difference, even if the structure is the same. Purchase a second homeHowever, it is very different from buying i investment property. Here’s why:
- Taxes: The IRS treats second homes and investment properties differently, changing how you report income from the property and what you can claim as withholding.
- Lenders: Lenders look at the two types of properties differently when you apply for a loan. You will need to review their eligibility criteria carefully.
- Living: A second home is where you live part of the year, and you don’t need to live in an investment property.
- Size: An investment property can have more than one unit, such as a duplex or apartment building. A second home is usually a single-family unit.
- Insurance: The type of insurance you need is different for a second home versus an income property. Property insurance does not cover tenant lawsuits or loss of rental income while second home insurance does not.
Your broker can help you determine the type of financing you need and how to apply for it. We can also help you define your goals and find the best lender.
Why Choose a Commercial Loan?
If you are a home owner, you are probably familiar with the home loan process. Therefore, it makes sense that you would consider doing the same when you are ready to buy a new property. However, if you are buying a property to generate cash flow, you can get more benefits in terms of commercial loans.
- Flexibility: Commercial real estate lenders move faster than traditional residential mortgage lenders and allow for a wider range of terms. It also closes quickly, helping you grab that perfect spot first.
- Eligibility: Commercial loans can be based on your local income instead of your personal credit score. However, lenders may consider your personal finances.
- Opportunity: Once you reach four units or more, the chances of finding a property for sale increase significantly. Commercial loans allow you to purchase multiple properties under the same loan.
- Scalability: The bigger the investment, the more cash flow you can get. A two-level building will benefit more than a duplex. Home loans will limit you to small areas.
Because they are flexible, there are many options when it comes to commercial real estate financing. Your lender will show you the most suitable loan to help you meet your investment goals.
Match Property Types to Your Purpose
A diversified portfolio balances risk and is more resistant to market volatility. If you already own a single-family home, consider a retail or mixed-use property as your next move. Be sure to match the property type with your current investment goals. Your broker can help you evaluate the performance of an investment property based on what you want to achieve with your portfolio.
Travel Destinations: Vacation properties generate seasonal income, especially near beaches, ski resorts, and special events. They require active management, which is why you can choose to work with a management company or rental platform (AirBnB, Vrbo, etc.).
Property based loans (aka DSCR loans) are increasing and are based on the earning power of the property. Private lenders are often short-term rental investors and understand the nature of the market better than others. They are generally more flexible than traditional lenders. Discuss these options and more with your broker, who will give you feedback based on your investment goals.
Duplexes and Triplexes: Having multiple units in an area can fill gaps and bring in stronger income than a single-family or vacation property. They are small enough to manage themselves or manage part-time employees. Duplexes and triplexes can generate income year-round, depending on your lease terms.
Portfolio loans are popular with investors looking for custom terms or who don’t meet the traditional lending criteria. A private loan is a short-term loan that allows you to secure an investment quickly and have more relaxed qualification requirements. Ask your dealer if one is right for you.
Many families: Multifamily real estate typically has four to five units on one lot. At this stage, many investors choose to hire a management company. Ideal for investors looking for consistent cash flow, risk diversification, and uncontrollable growth.
USDA loans work best in rural areas when you plan to live in one of the units. Commercial Mortgage-Backed Securities (CMBS) can be good for investors interested in non-commercial loans with large amounts and low interest rates. These are just a few options your dealer can share with you.
Office: Investors can often lease offices for longer periods than multifamily buildings, reducing vacancy rates and providing long-term cash flow. They are suitable for investors who want consistency and low maintenance costs.
SBA 504 loans can be a good fit for office investors and small businesses. They offer limited fees, competitive rates, and low fees when you share your office space with tenants. Life insurance companies also finance real estate. They come with lower rates and longer terms but can be very difficult to qualify for. Ask your broker how they can help with your loan application.
Sales Center: Retail centers such as supermarkets and shopping centers can generate a lot of revenue, but they require effective management. Some leases allow you to receive a portion of your tenants’ income. They are generally suitable for investors who want high returns and don’t mind slow appreciation.
Bridge loans provide financing for acquisitions and repairs before the investor receives permanent financing. SBA 7(a) loans are flexible and low-interest, and they provide working capital. Ask your broker how you qualify, even if you’ve been denied a commercial loan before.
A well-chosen asset not only generates income but also appreciates over time, helping investors build long-term wealth. Property values, appraisal values, loan terms, and interest rates all vary by market, property class, property type, and location. A class A multifamily neighborhood near a tech hub, for example, may work better than a class B multifamily neighborhood by the beach. Working with a professional broker will help you make decisions that maximize equity in your portfolio.
