Mortgages For Real Estate Investments
In the event that you have to get a mortgage for your first real estate investment property, take your time to look at the different choices available. Of course, it helps to have great credit. The better your credit is, the better chance you have of getting the loan that you want. Here are some choices when it comes to getting a mortgage loan for your property:
Fixed Mortgage
A fixed rate mortgage usually lasts for 30 years and doesn’t change, hence the term “fixed rate”. This is the mother of mortgage loans. For a long time, real estate investors were only able to get this kind of loan.
When they get this fixed mortgage loan, it comes with a fixed rate that remains throughout the duration of the 30 years or less if they pay it off quicker. Upon the end of the e30-year term, the loan will be considered paid in full.
In the beginning years, the monthly loan payments are applied toward the interest of the loan. As the years pass, they are eventually applied to the principal balance. This is about the easiest loan for investors to deal with because the terms are simple.
You usually won’t find anything unexpected down the road as you continue to pay it off. Real estate investors would probably want to look at paying off the loan early so they won’t be saddled down with a lot of debt for a long time.
The focus of real estate investing is to create wealth, not to always have financial liabilities. When investors get wealth from real estate investing, they can enjoy it as they continue to invest in more properties.
No-Money Down Loans (Zero Investment)
This is another type of mortgage loan that can be used by real estate investors. They won’t have a problem trying to get information about this kind of loan, because they are always advertised somewhere. It can sometimes be touted as one of the best loans since sliced bread. However, it’s important that investors know the risks about securing this kind of loan.
Real estate investors can get this kind of loan by securing a mortgage that is 100%, or they can get what is called a “piggyback” mortgage. A piggyback mortgage is when the investor secures two mortgages at the same time and put them together.
With a piggyback mortgage, the investor gets a perk by not needing a downpayment at the closing process. Also, the investor can benefit from getting the largest amount of interest available to include in their taxes as a deduction.
Being an investor, it is not always guaranteed that you will get the entire amount financed for the loan. There are many banks and other lenders that will not provide the entire 100%. If some do decide to provide the entire thing, then they will get their share by including higher interest rates. This way, they can cover themselves because you would not have provided a down payment.
As with anything else that is zero-down, your mortgage payments will be higher than usual. If you don’t have a lot of money as a financial backup, this kind of loan could hurt you in the long run.
It would take you longer to have a comfortable cash flow because you would be paying a larger amount in mortgage payments. So, you may want to think about this loan option a little harder than you would others.
However, a zero-down loan could still work out for you in terms of securing an investment property. It’s up to you as to whether or not you’re willing and able to take the risk.
Adjustable Rate Mortgage
Adjustable rate mortgage loans, or ARMs, as they are commonly known as, are almost as popular as fixed rate mortgages. Real estate investors are known for using these as well. If you decide on this loan, you can be assured of having a variable interest rate.
A variable interest rate is the rate that lenders charge and it often fluctuates. The rates change in accordance with the increase or decrease of interest rates in the market during that time.
It would start off with a fixed rate for a few years. Then it would go into a variable period. This means that after the fixed rate period is over, your loan rate (and monthly payment) is subject to adjusting every year.
With that, the majority of ARMs have a stopping point of how much they can change. With this loan, the rate can increase or decrease to a certain amount as long as you have it.
In the beginning, this kind of loan may include a low rate of interest. For some real estate investors, this would work for them because they may not want to hold on to the property for an extended time.
Also, when the interest rates decrease, investors can grab at the chance to get in on them. On the other hand, this loan is very risky. When interest rates increase, the investor will have to go with the flow.
The bad thing about this is, they will not know in advance when the rates will increase. In reality, ARMs can be an unsure thing because you don’t know how much money you will continue to pay due to the constant fluctuations.
Interest-Only Loans
Another loan that is good for real estate investors in the interest-only mortgage loan. Investors can use this loan when they are having a hard time with getting positive cash flow. This usually happens when the value of the property has increased.
Some investors normally get interest-only loans if they don’t want negative cash flow, if they want to use the cash for something else, or if they’re thinking about getting into property flipping for a future date.
When an investor has this kind of mortgage loan, they can hold off on principal payments for a certain period of time. It is usually no more than ten years, but could be less than that. The investor is only paying the interest and nothing else during this period.
In order to get rid of the principal in the future, the loan is amortized again after the period of only paying the interest has ended. The investor ends up paying a higher mortgage loan payment. There are several ways that the investor can handle this situation: sell their property, stick with the higher payment or try to refinance.
Balloon Mortgage
Having a balloon mortgage is not one of the popular kinds of mortgage loans, but real estate investors have used them. This mortgage increases using a longer time than the actual mortgage term. The investor ends up with a smaller payment.
However, at the term’s end, there will be a balance that the investor has to pay in full or refinance the loan. If the investor can’t pay the lump sum in full or get refinancing, they will end up selling the property.
Even though there is an advantage for smaller mortgage payments in the beginning, at the end, the investor can come out as the loser if they can’t pay off the entire balance or refinance. Plus, with refinancing, the investor will have to deal with an interest rate increase, plus refinancing costs. That’s just more money coming out of their pocket than necessary.
Can You Be A Landlord?
That is essentially what you will be when you have real estate properties to rent out to prospective tenants. Before you leap into the world of collecting rents and dealing with renters’ issues, you have to know that going into this you will need patience and understanding.
Along with that, being a landlord also means you will:
Other than rent, there will be times that the renters will contact you regarding the investment property. Sometimes it may be regarding a repair in the home. Other times it may be regarding the tenants themselves. Of course, you may get a tenant that pays their rent late or will try to skip out on paying it and disappear from the property.
However, once you are able to establish a relationship with the renters, they may find you easy to work with. In order for the cash flow to be consistent, you must be willing to some type of communication with them, instead of just looking for that rent payment on the 1st, 3rd or 5th of the month.
Be respectful to your tenants. After all, they are the ones that are helping you to create wealth (monthly rent). If they call you, return their phone calls as soon as you can. If repairs are needed in and on the property, get the appropriate people to do them.
Let your tenant know that you care about them and that you appreciate them selecting your property to live in. Remember, they can always find somewhere else to live and make another investor wealthy. Effective communication is the key.
Screening Prospective Tenants For Your Rental Property
Back in the day, you could put up a “For Rent” sign in the window or front yard of the property and get a decent tenant in no time. Or there would be advertisements in the newspaper. However, with the times changing and people not as trustworthy, real estate investors now have to use modern technology and other tools to screen for potential renters.
Along with the screening come legal issues that you as a real estate investor need to know about upfront before you start the process. That would include:
It’s a good idea to read up on the policies and procedures regarding this. Knowing the information beforehand can save you from potential litigation and shelling out thousands of dollars. If you are still not sure, hire an attorney that specializes in this area.
When a real estate investor or landlord wants to screen potential tenants, some of the things they should know about include:
The prospective tenant needs to fill out an application. The application should be completed in full. Anything that does not apply to them should be marked with a dash or N/A (not applicable). Go over the application to make sure it is correctly filled out. Ask the applicant to provide you with character references that can be checked.
Ask for a photo ID to make sure that the person is who they say they are. The ID, such as a driver’s license, should be valid. Copy the driver’s license number on the application.
Let the prospective tenant know that you will have a background check as well as a credit check done. This can help you to weed out any potential problem renters. They will have to provide their consent for the credit check.
Set up a time to meet with your prospective tenants in person. In the world of modern technology, face-to-face meetings can get pushed to the back burner. However, meeting them in person can show you their personality and if they are someone you would want to rent your property to.
On the application, have a code of conduct that they are to adhere by should you allow them to rent from you. The code of conduct will also include what is expected of you and what is expected of the tenant. Make sure it is explained in a manner where they can understand it. If you’re not sure about the wording, seek counsel from a real estate attorney that specializes in this.
One of the most important things that you must do is to follow the policies and procedures of the Fair Housing Act, or FHA. This helps to keep you in line as well as protect prospective tenants from being discriminated due to race, religion, gender, disability, sexual orientation, etc.
Read over the policies carefully. You may have to read them several times to make sure you understand and avoid unnecessary litigation. You must work to avoid the appearance of being biased in any way, shape, form or fashion.
Calculating Monthly Rent
In order to determine how much rent to charge, there are a number of things that factor into this. First you have to look at the supply and demand within the real estate market. There may be other real estate properties similar to yours, but do you know how many there are?
You may have a tough time if you find out that there are plenty of vacancies for the taking. For you, that also means that you will be facing steep competition from others who are trying to do the same thing. When you’re trying to come up with a price, that can have a negative effect. You may have to consult with experienced real estate professionals to assist you with this.
Do you have property in an area where it is booming or do you have more people moving out? You will be able to provide good rental prices if the area is stable and on the upswing.
Depending on what will benefit you, you may choose lower rental prices over higher ones, and vice versa. One thing that you will need to do is to check out other properties and find out what they are renting for. Get a real estate agent to assist you. They have the tools where they can get information on the prices of home in nearby neighborhoods.
If you see some “For Rent” signs, then you may want to call the number to inquire about how much the property is being rented for. Search online for tools that can help you get comparable rental prices for similar properties in the area. Don’t forget about the MLS system.
Once you have come up with a price for the rent and put it in place, you will have to work on maintaining a profit. Initially, you may not see much, but as different things happen, such as inflation and the like, you will have more expenses and your taxes will increase.
However, you can counter that by raising the rent. After the end of the current term is when the rent increase would take place and start with the new term. You want to keep the tenants that you have so that the cash flow will continue to come in. In order to do that, you must keep the lines of communication open with them. Once you cut it off, they will be more tempted to leave.
Having Repairs Done
There is no doubt that with a home, something will eventually need to be repaired. Anything that is physical is subject to break or get out of shape at any given time. People live in homes and things will break.
As a real estate investor, you are obligated to make sure that your tenants are not living in danger. It is important when something is reported as needing to be repaired, that you will step up to the task.
Or at least use funds to get a professional to do the repairs, which is probably a better idea anyway. Some investors wouldn’t dare touch a nail, let alone a hammer, which in reality, can keep them from getting burned out.
Even before you purchase the real estate property, you need to include repairs. Something is always going to need to be repaired or replaced, no matter what. That’s just the nature of the real estate investing business.
Repairs may be one of the last things that investors think about, if at all. What’s more important to them is making sure they receive their rent payments on time, paying taxes and other related issues regarding money. Of course, that’s important too, but it’s usually the little things that they don’t think about until something happens.
As a potential real estate investor, it’s important that you look at the property carefully before you rent it out to a tenant. Having an inspector can serve as a backup. They can help you find more things that need to be addressed.
Some of those are minor cosmetic issues, others can be a little more serious. Either way, it’s important that you have funds set aside for repairs and replacements.
Be careful when it comes to this. You don’t want to purchase a property that requires a massive reworking and repair. That will not only cost you time, but it will also cost you money. If you don’t have the funds on reserve up front, then you will find yourself strapped for cash.
That’s one reason why it is stressed that you as an investor have a reserve of funds set aside in advance. Set a budget for repair and replacement work. Otherwise, you should bypass that property and find one where you may have to do minor work on it. Also, when a repair has to be done, get it taken care of as quickly as possible so conditions won’t worsen.
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