If you’re looking to invest in a Real Estate property, there is information you need to know in case you need to get a loan in order to start on this business.
The first thing you need to have in mind is that there are different terms for loans when purchasing a house for the first time and when it’s your second property and also, depending on the number of units you may get a different type of loan.
Personal loan
If you’re purchasing a 1 to 4 unit property, you will need to apply for a personal loan. This means the requirements will include your income level, credit score, and insurance. For this loan, there is a need to have a stable income. Let’s see on an example, how this loan would work:
- You have a $60,000 income yearly and want to purchase an investment property (4 units building).
- You will be living in one of those units and rent out the remaining 3 for $1,000/month. This translates on earnings of $36,000/year.
- The amount of the loan will be based on 70% of the potential income from the rents added to your current income ($60K), giving you approximately a total yearly income of $85,000.
- With this base, the amount of the loan might be higher, and this way you can purchase a 4-units building instead of a single house and make a profit from it.
- Have in mind that if it’s the case you’re buying a second home, you’ll be requested to live at least for 2 years in one of these units in order to be able to sell it in the future without incurring in any penalties related to taxes purposes.
Commercial loan
This type of loan applies when purchasing a 5 to 100 unit property. With this loan, you don’t need to prove a certain level of income, since you will get the income to pay for the loan out of the rents of those units. The requirements will be to have good credit, cover your expenses and maybe have some money saved, however, there will be no need for a job or stable income source besides the one you’ll be perceiving form rents.
Let’s have a look of an example for this loan:
- You have no stable income from a job but have good credit and some money saved.
- You are interested in purchasing a 100-units building.
- You’ll be asked to pay a down payment of 20% and the rest can be financed.
- You plan on renting each unit on $1,000/month, which translates into a $120,000 income yearly.
- This is the base the bank will take into account for the loan since it will be your income in the next years and will back-up the payments needed for the loan.
As you can see, there are many profits of investing in a rental property and there are options to each strategy and business plan in order to get a loan. Contact me to help you make the right decisions and moves for your investments in Real Estate.
