Everything You Need to Know About Real Estate Investment Loans
Real estate investing can be a secure and lucrative investment. If you’re patient enough, you stand to make a lot of money in the long-term with proper real estate investing strategies. Real estate investment loans can make your dream a reality and help you start investing in the real estate market today. Read on to find out everything you need to know about real estate investing and real estate investment loans. Looking to start building your wealth today? Then you’re definitely in the right place.
What Are Real Estate Investment Loans?
A real estate investment loan isn’t the same as a typical loan or a mortgage. It is evaluated differently by the bank and other financial institutions because it is money being loaned to help you purchase a property that incurs revenue. Real estate investment loans are based on the value if the real estate property you’re looking at and the revenue it incurs. This is largely looked at as a business expense, even if you are borrowing the funds privately for a smaller property with only a couple of units to rent.
Real estate investment loans may require a smaller down payment than would typically be required for a personal mortgage on a primary residence. This is because a rental property brings in revenue and can sustain the payment of the mortgage and other necessary expenses related to it. In addition to being evaluated differently, real estate investment loans are also tax deductible whereas a traditional mortgage on a primary residence is not. This is because it is considered a source of revenue for you and you literally have to spend money to make money.
A real estate investment loan applies to an income property or even to a property you are purchasing commercially to be able to flip and resell. If the purpose of the real estate you’re buying is to grow your wealth, it is a real estate investment loan that you’ll need to get yourself started.
Why Invest in Real Estate?
Investing in real estate is a relatively safe and secure way to invest your money. Not only do you only need a tiny percentage to get going, but your rental income will take care of paying the mortgage. That means that while your property is appreciating in value, you quite literally can sit back and relax. Of course, owning an income property does mean you’ll have some work to do, but in terms of finances, your money will grow exponentially without you needing to add more.
In the long term, historically, real estate has always been safe. In times of economic uncertainty, real estate can drop in value but overall, real estate always grows in the long-term. Many people choose to purchase a property as their retirement fund. Meaning they purchase it today and only sell it when they are ready to retire. Over the 30 or so years that pass, the property has appreciated in value. You can then sell and pocket your profits, less your capital gains tax. (Unfortunately, there is no way around taxation.)
Like any investment opportunity, the value of your property can fluctuate but it is very rare for real estate to drop in value. If you ever need to boost your cash flow, you can also take your properties and sell them. Or, you can have them re-evaluated to find out the current value (which is going to be higher than the value your mortgage is based on) remortgage them and withdraw the increase in value for yourself.
There are no such things as safe bets or guarantees when it comes to finances but real estate investing is about as safe and secure as it can get when it comes to investing your money.
Benefits to Real Estate Investing
There are so many benefits to investing in real estate. For starters, you can deduct your mortgage payments, expenses, property tax, and repair and maintenance costs from your annual income taxes. This can be a huge savings every single year. But an even bigger advantage is the reality of having tenants pay for the equity in your property. Yes, you put down the initial down payment to secure the real estate investment loan, but the mortgage payments and expenses are paid by your tenants. That means they are investing in something that you get to keep. Their money goes into building equity in your real estate property, not yours.
If you keep your rental properties long enough, you are also looking at securing yourself income for the future. An income property can bring in revenue for you after you stop working. This is known as passive income. You can get some passive income if your income exceeds you expenses and your mortgage payments, but you can get even more passive income once your property is paid off and the rents go directly into your pocket.
Another advantage to owning real estate is diversification of your investment portfolio. You should never keep all your eggs in one basket. That means it is best to diversify your income and invest in different things so you can ensure your overall wealth continues to grow no matter how things change.
Challenges of Real Estate Investing
As with anything, there are some challenges associated with real estate investing, too. The first disadvantage of real estate investing is the capital gains tax. Of course, you’re still making money when you sell your property but a percentage will have to go to covering your capital gains tax. It’s better than not gaining any funds at all and to be fair, we have to pay taxes on all income and there’s just no way around it.
Another disadvantage of real estate investing is dealing with tenants. These people are paying the equity into your property, which is great. But they can also be difficult to manage at times. You may luck out and get some great tenants but not all the tenant experiences you have will be great. Some people will be late on payments or will file complaints with the governing board in your province if they feel you are being unfair. Many laws are in favour of the tenant so a landlord may have very little recourse if a tenant doesn’t pay, won’t leave, or damages your rental unit. These are just some of the challenges you’ll have to accept if you decide to begin real estate investing.
One last disadvantage is empty units. When your income property is fully rented, it should bring in enough money to cover the mortgage, expenses, and even leave some extra money for you. If you have vacancies, you may not have the funds needed to keep your building going. You 3want to avoid that situation as much as possible. You may need to lower your rent or accept less than stellar tenants to ensure your cash flow continues to pour in. Vacant units represent lost income. Filling your units is essential to ensuring you can keep your building and allow it to appreciate in value.
How to Get Started with Real Estate Investing
If you are interested in real estate investing, you should start by reading up on real estate laws in your province. Get a hold of as much information as possible so that you are ready to go. You want to be as informed as possible before you invest. The next step is finding a realtor you can trust or even becoming one yourself.
Once you have gotten all of the real estate information you need, meet with a financial advisor to understand how to go about investing, what you’ll need, what you are eligible for, and how this will affect your taxes and your income. You need to have a clear understanding of how real estate investing works before you get started. Keep in mind that a solid plan will help you achieve your goals and understanding that real estate investing is a long-term goal is also important. If you’re looking to get rich overnight, real estate investing will disappoint you.
How to Find the Right Property for Real Estate Investing
Finding the right property can be tricky. Be prepared for it to take some time. It’s well worth it to wait for the right property. It’s not a wise decision to buy something that isn’t right just to get going sooner. This can turn out to be a costly mistake. Here are some things to consider when looking for a real estate property to invest in:
Location, Location, Location!
The location is everything. Look for an investment property that is in a good neighbourhood and is located near things most renters want, like easy access to public transit, grocery stores and pharmacies within walking distance, good schools, etc.
Pick a Building You Can Maintain
You have to be able to reasonably maintain that investment property so choose something that isn’t too old or needs too much work. Unless you can do odd jobs yourself, don’t choose a building that is over 100 years old. Those buildings may need to have some major electrical work done and if you can’t do it yourself, it can be very costly. Look into the potential costs of maintaining the building yourself before you commit.
Evaluate the Financials
To be sure you can afford the building comfortably, calculate what your mortgage would cost you minus your down payment at the current interest rate. Next, add in the costs or property taxes and other expenses like snow removal, gardening, and cleaning services, if applicable. The next step is to look at the rental income and ensure that it covers all of those costs. You want to make sure that every year you bring in enough money to do the following:
- Pay expenses and mortgage
- Put aside 10% for repairs and maintenance
- Can sustain the payments even if you have a 10% vacancy rate for six to 12 months
If you can bring in enough income to cover all of those things, then the property is a solid investment. If you come up short, move along to another property. Otherwise, you may be stuck making payments out of pocket every year just to stay afloat.
Ask to See Previous Rental Report
Before you agree to purchase an investment property, ask to see the reports of the tenants for the last few years. This will show you if there have been repeat vacancies over the years. This is an important element to understand before you invest. Ideally, you want a building that is easy to rent so you can secure yourself revenue every month.
Get a Building Inspection
If you are interested in a building, do no forego the inspection. If the seller is pressuring you to buy quickly, let the deal go. You absolutely need an inspection to ensure there are no costly hidden secrets in that building.
Hire a Lawyer
Before you sign anything, be sure to have a lawyer review everything. This will ensure you do not encounter any issues with the purchase or get stuck signing a document that relieves the previous owner of their obligations.
Brush Up on Local Tenant Rules
Every province has their own set of rules and regulations for tenants and landlords. It would do you good to get to know these laws before you jump in. Tenants will always know their rights. You should too. This will prevent any issues with your tenants and ensure you are always compliant.
Different Types of Real Estate Investing
If you are interested in investing, there are several avenues you can explore. You can look into income properties to get started in real estate investing. These are typical multi-unit buildings with several rental units inside. You may live in it or not. If income properties are not for you because tenant relations are too stressful for you, you can also consider flipping homes. If you have the experience and the contacts to build and renovate, you can also invest in old homes, flip them, and sell them. Flipping homes can be a great investment opportunity if you know how to get the work done or if you can do it yourself.
Another way to begin real estate investing without getting your hands dirty is to invest in a Real Estate Investment Trust (REIT). A REIT is an investment in companies that invest in commercial real estate. So, in other words, someone else is doing the dirty work and you’re just piggybacking off the profits. You will likely make less money than you will with real estate investing, but you’re also not really doing anything. You can literally invest and then sit back on your couch for years and wait for the investment to grow.
How to Qualify for a Real Estate Investment Loan
If you want to qualify for a real estate investment loan, you should start by meeting with a mortgage specialist or a mortgage broker. They can help you understand what it costs to get started and what amount you can safely borrow. The loan amount will be based on the building’s revenue so you need to evaluate whether or not you can afford the down payment. The bank will also want to ensure you have another means of income should you be stuck with some vacancies. To find out what you qualify for, meet with a specialist. Your other loans or debts may play a role.
Can You Start Real Estate Investing with Bad Credit?
If you have bad credit, you may still be able to start investing in real estate. The loan is based on whether or not the building revenue is enough to cover the costs. You’ll have to find a very profitable business if you want to be approved with bad credit. In a worst-case scenario, you can also apply for a debt consolidation loan to minimize the impact of your debt and see if that helps you acquire a property loan quicker.
If you are refused by a traditional banking institution for bad credit, you may qualify for a loan with a private lender like BHM Financial, Canoco Consulting, Cash in 24, or Trufco – to name a few. Private lenders don’t base their decision to lend you money on your credit score or your credit history. Instead, they base their decision on your income and revenue from the property in question.
When Can I Start Investing in Real Estate?
Many people think they should wait until their own mortgages are paid off to get started. However, you stand to gain more by investing sooner rather than later. It’s better to have a little less spending money today to have a huge payout tomorrow. Investing in real estate isn’t an overnight success story and it may require some sacrifice but in the long-term, real estate investing can be a huge financial success for you. There’s no time like the present to apply for your first real estate investment loan.