Investing in real estate is a lucrative venture, especially in Sun Belt areas like California where about 50% of the US population is now held and is expected to grow to 55% by 2030. You’ll have to conduct tons of research to ensure you’re making the most of your investment, so let’s delve into real estate financing for your prospective investment properties by laying out your options.
What Are Your Real Estate Financing Options?
Commercial Loans
Applying for a commercial loan is among the best choices since it has the lowest interest rates. These long-term loans mean you can pay them off in smaller amounts throughout. Commercial loans are mostly unsecured, so you won’t have to offer collateral for the loan. You will need the following for your application:
- Business credit score
- Business plan
- Financial statements
- Cash flow
- Tax returns
- Anticipated rental income
There are drawbacks to this option. If you’re a first-time real estate business owner, you might not qualify for the loan. You’ll have to provide a lot of detailed paperwork to prove that you can pay for the loan and disclose your plans for the loan you’re applying for.
Private Money Lenders
You can get the funding you need from a private lender, which can come in the form of a private organization or a wealthy individual. These are real estate investors who offer short-term and high-rate loans. Since it carries more risk than traditional options like commercial loans with the lack of requirements, high interest rates are a way of minimizing the potential loss. With that said it can be harder to find private money lenders, especially if you do not know these individuals or organizations personally.
Federal Housing Finance Agency (FHFA)
This form of loan is applicable for residential properties properties like single-family homes and condominiums. The upside to this option is it has lenient requirements like lower credit scores, higher debt-to-income ratios, low down payment rates, and no income records needed. However, the loan amount you can get is significantly lower than the other choices. You might also have to pay mortgage insurance premiums, and FHFA loans have more strict requirements.
Factors to Consider for Your Real Estate Investments
To figure out which is the best real estate finance option for you, you should first look into several factors regarding the commercial or residential properties you aim to acquire.
Property Type
Determine what kind of rental property you want to invest in first. Commercial real estate like office buildings or retail spaces, for instance, might require you to have a large down payment for the investment property. If you need assistance in the real estate market, Blue Line Property Management offers services to guide you with your investment decisions as you build your rental portfolio.
Risk Tolerance
If you're new to real estate investing and cannot afford to lose the assets you put into the investment property, you could start small. You can consider real estate investments like one-bedroom rental properties. Since it can be overwhelming at first, you can consult a property manager for financial planning and investment strategies for your home-buying process.
How Fast You Can Generate Income
To ensure that you can pay for the loan of your real estate purchases, you have to match your income with the loan payments. If you think your rental property won't generate rental income right away, then maybe hard money loans from private lenders aren't your best option for real estate finance.
Credit History
There are several factors that real estate lenders will put into careful consideration, but credit score is among the most significant. Many investors frown upon less-than-perfect credit scores since it implies that you won't be able to repay the loan in the terms they provided. If that's the case, then you could try to borrow money from the federal government for your property investment needs.
Interest Rates
Each type of loan comes with a different interest rate. You will find that some are higher and may affect the rental income you generate in the long run. Weigh your options and always opt for the choice with the lower interest rate if you can get them.
Market Trends
Research local market trends in the East Bay Area to determine which residential and commercial properties you want to invest in. The Oakland real estate market is known for its high demand, limited inventory, and increasing property values, especially since it's in proximity to San Francisco and Silicon Valley. You should hire one of the highest-rated companies in the Bay Area like Blue Line Property Management to advise you with real estate finance.
Frequently Asked Questions:
What Are the Tax Benefits I Can Get?
Some potential deductions include mortgage interest, property taxes, and insurance premiums, although that will depend on various factors like your income, expenses, and property type.
Are Loans Harder to Acquire for Rental Properties?
As opposed to loans for a primary residence, requirements for a loan will be more strict when it comes to rental real estate investing. Even other investors like hard money lenders need assurance that you can pay your loan.
Where Can I Find Potential Investors for a Private Loan?
The difficulty of finding a private investor will depend on your network. The more connected you are, the more opportunities will come your way. You should look for an investor in your inner circle first, and branch out to new investors if you fail to find one. Some property management companies like Blue Line already have a well-established network you can utilize to avoid doing it yourself.
What Kind of Properties Should I Invest in for the First Time?
The real estate market has a lot to offer, but it's always a good idea to start small first. A well-positioned home is your safest bet for a steady income, and you can expand your portfolio by browsing through commercial properties once you get a sense of real estate finance.
Services Beyond Real Estate Investing
Purchasing real estate properties is only the first step. The real work begins once you start managing the business. You will have to oversee several aspects of the property such as marketing, tenant screening, rent collection, maintenance, inspections, financial reporting, and more.
Having a property manager with knowledge of the East Bay Area real estate market will be beneficial to your investment. You can start by using Blue Line's free ROI Calculator to maximize your investment potential when you buy a property.
