Thursday, December 17, 2009

Investment Property Loans

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At some point you might want to supplement the stock market investing that you do today with other types of investments like rental property. The hard part those is finding a good source of money for your investment property loans. My first rental property was a house that I lived in. I originally bought it to live in a got an FHA loan. After a couple of years, I was able to move into another house and was unable to sell my house so what I did was advertise it for rent with an option to buy. I actually had more interest in it than when I listed it for sale. I think once you get into real estate investing, you'll figure out that a lot of people are in situations where they can't get a conventional mortgage loan and they need someone to "be the bank" on their behalf.

By doing what I did, I was able to get around the traditional investment property loan by getting a residential loan first. This enabled me to get a lower interest rate and put very little down. I had to live in the property a couple of years before I could do that which I did. You have to read your mortgage carefully because some lenders won't permit you to do this and can exercise their right to call the loan. Whether they would do that in today's economy, it's unclear, but they can. This would leave you and your tenant in a tough spot if so.

Using this strategy, you may be able to convert the homes you lived into your real estate empire by securing investment property loan rates that are lower than if you outright applied for the loan as an investment. Those rates are typically higher plus you usually have to put more down. Investment property mortgage loans also have tougher underwriting standards than residential property loans do.

Once you've got a tenant, I'd make sure that you do two things. One, make sure that they rent the place for one year with some option money. Make the option money contingent on "on-time payment". One late payment and the option money is forfeited. You can always allow a buy back of the option money to keep the tenant motivated to perform their part of the agreement. Or, in your head give them one mistake and do them a favor by not surrendering it unless their is a second violation of the terms of their deal. The second thing I would do is make sure that they cash with each payment and never take a check.

After you've got a few properties under your belt, getting loans for investment property will be a lot easier.

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