There are many ways to make money out of the typical business world, and one of these involves renovating houses. If you’ve been drawn to the concept of renovating houses and cashing in, then you’re what is commonly referred to in the real estate world as a flipper. Flippers purchase properties for low values, enhance them, and sell them for a large profit. Before you get started on your first flip, here are some key things you should know about investment property loans. You should know that many are short-term loans, their interest rates are high, points are commonly used, and you may need reserves or a larger down payment.
Many Are Short-Term
As a flipper, your financing strategy tends to include a lender who will supply you with cash for the purchase and renovation of a project. These loans are often offered for only short-term periods, like six months to a year. You’ll be expected to pay interest payments on the funds that you borrow throughout the loan term. At the end of the loan, you’ll be expected to pay a balloon payment. This is the total amount borrowed for the loan and any fees included in the short-term mortgage.
Their Interest Rates Are High
Due to the nature of this type of loan, many lenders will supplement their risk with a very high-interest rate. Rates typically run anywhere from 8 to 15 percent per loan. As you’ve likely figured out, this is much higher than a traditional 2 to 5 percent that you would receive on a 30-year home mortgage loan.
Points Are Common
In the financial world, points are a simple term that describes an amount of money that you’ll need to pay. One point is equal to one percent of the total amount of the loan. For simplicity, let’s say you’re going to be charged one point. If the investment property loans you’ve been looking at are for $100,000, that one point is going to translate to a charge of $1,000. Points can be paid upfront to reduce the interest rate of the loan, or they may be tacked onto a loan offer to further reduce risk for the lender.
You May Need Reserves
Investment properties are seen as very different than first home residences. Your lender may require you to show the validation of reserve funds. Reserve funds are those necessary for paying for services in advance. For example, you may need to have reserves in a bank account equal to three full-months of your interest payments before the loan is approved.
You’ll Need A Larger Down Payment
Traditionally, home loans require 20 percent of the purchase price upfront. This amount is called the down payment. When you apply for an investment property loan, that percentage tends to go up. In most cases, you’ll be expected to bring 25 percent or more of the purchase price to the closing table.
As a real estate flipper, investment property loans are going to be an avid necessity. You should continue to learn more about them as you progress in your career. When you understand how they work, you can better position yourself to profit during your flips.
By Brooke Chaplan
who is a freelance writer and blogger. She lives and works out of her home and residing in Los Lunas, New Mexico.
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