Real Estate Investment Loans
By Kris Koonar
A loan on secured by real estate collateral is typically known as a mortgage. This is the most popular form of real estate investment loan used by investors. Real estate investments provide an opportunity to generate cash flow. Apart from commercial banks, savings banks, savings and loan associations, credit unions, real estate investment loans can also be obtained from insurance companies, mortgage bankers, mortgage trusts, investment trusts, pension funds and finance lenders. Private individuals sometimes offer real estate investment loans as well.
There are 2 types of real estate investment loans — residential loans and commercial loans. Property that is solely used for business purposes like malls or industrial parks would be termed as commercial real estate. Commercial loans include buildings, warehouses, and stores. These properties are generally 5 or more units. Property that is solely used for single unit housing purposes is termed as residential real estate. Residential loans include those properties that are bought for rental income and future appreciation. The borrower initially receives a lump sum from the lender, which has to be paid back in installments. To purchase a residential property involves having significant funds. Before a loan is granted the 3 main factors that are considered are, the investor’s income, credit scores and reserves. In order to get a loan there are 5 basic essentials, which are interest rate, terms, payment, final value and principal. loans can carry a fixed interest rate or rates that vary with market conditions. Some loans have negative amortization periods; investors should be careful of such loans.
Real estate investment loans consist of interim loans, short-term loans and long-term loans. Apart from commercial and residential loans, the other types of loans that are offered are construction debt, permanent debt, equity financing, structured financing, interim financing, mezzanine financing, foreclosure investor money, hard money loans and residential repair funding.
Investors may not need perfect credit scores to qualify for real estate investment loans. Bad credit real estate loans are designed for those individuals who have a less than perfect credit report. It is a type of sub prime mortgage and is a higher risk to the mortgage lender because of the past credit history of the borrower. Bad credit loans allow individuals to obtain a mortgage for buying real estate when
other more conventional mortgage lenders or banks may have turned them down.
The longer the tenure of a loan; the higher the rate of interest will be. A 30 year fixed loan will have a higher rate of interest than a 2-year fixed loan. But people generally opt for a loan with a shorter-term fixed option, as the rate of interest is lower and hence the monthly payment is lower. To get a loan there are no pre-determined limits set for the real estate investor.
Some real estate investors tend to prefer in marketable real estate assets. Buying shares in a REIT (Real Estate Investment Trust) is one way to do this. Investment loans can be use to partially fund such investments and the REIT shares are used as collateral to secure such loans.