It’s impossible to get a loan to finance your next purchase of stocks, bonds or commodities, but real estate offers investors the chance to make money using borrowed funds. That’s a huge advantage for investors who want to maximize the yields provided by single-family rental real estate. Given a set amount of capital, a real estate investor can use leverage to purchase a range of homes in different rental markets.
While this increases the investor’s risk in some areas, it also provides a degree of protection from fluctuations in any single market. Additionally, by selecting SFR investment properties carefully, investors can earn much larger profits than any solitary property could provide.
Using leverage to purchase properties is most effective when rental rates and property values are on the rise. Strong rental rate appreciation means SFR investment properties will provide increasing cash flow that helps to cover the monthly cost of a mortgage, while home price appreciation means investors are building equity in a physical asset that will provide profits when sold.
In April, the rate of rental price increases outstripped the speed of home price improvement, according to Zillow, and both remain very strong. This means that investors who want to benefit from leverage in the housing market can reap major benefits by acting today. For people just getting involved in the investing game, it’s important to know the differences between mortgages before you start benefiting from leverage in SFR investing.
A variety of financing options
Typical home mortgage
You can receive a standard home loan to facilitate your investment property purchase, but you will probably face different restrictions than if you got a personal loan to finance your home purchase. It’s difficult to receive enough financing for a SFR home purchase through Fannie Mae or Freddie Mac, according to The New York Times, and the restrictions on eligibility for loans applied to rental properties are generally much more stringent.
Mortgage insurance is not available on investment properties, which means investors need to demonstrate they have adequate funds to pay for the property. In practice, this means investors who purchase an investment property need to supply a 20 percent down payment. Additionally, investors should know interest rates on investment property loans are generally higher than those on standard home loans.
It is possible to use the rental income from one rental property to qualify for a loan on another structure, but this also comes with limitations. To take advantage of this leverage, you’ll need to have two years of documented property management experience.
Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) allows people to borrow money from the equity they currently hold in a home they already own. This can be a great way for investors to procure money needed for a down payment. The interest rate on a HELOC generally falls between 3 and 4 percent, so this option provides a relatively cost-effective way for investors to get the capital they need to get their first or second SFR property.
Once an investor is receiving monthly rental income from investment properties, he or she can either pay just the interest on the HELOC and keep the excess money or attack the principle to reinstate that equity in the home.
If you already own rental properties and want to use leverage to expand your holdings, it may be difficult to qualify for additional loans based on your income alone. Investors in this situation can turn to buy-to-rent mortgages that offer qualification criteria based on predicted cash flow from the rental properties the expect to purchase.
According to National Mortgage Professional Magazine, underwriters for these loans look at each of an investor’s properties separately and complete a cash flow analysis. This examines the expected monthly income and expenses for every property and provides comprehensive insight into the investor’s ability to repay loans. Then, the mortgage provider drafts a loan for an amount determined by the property’s potential yield. HomeUnion® can connect investors with buy-to-rent loan options that increase investor buying power.
Investors can use many other types of assets to qualify for loans that allow them to expand their property holdings. Through non-recourse loans, investors may use their physical assets as collateral to receive more money for home purchases. It’s also possible to get portfolio loans that lack mortgage insurance and feature rules arranged by the bank itself. These loans might allow you to qualify for funding you wouldn’t receive from a traditional bank, though the terms are likely to be less favorable.
Finally, investors can seek out loans from private investors or organizations. While these will offer more lenient lending requirements, they will also come with higher fees and interest rates, as private individuals are assuming the risk for a failed loan.
By investing a small amount of cash up front, investors can see larger gains due to property appreciation and rental rate increases. With leverage, a minor initial outlay can net an investor multiple properties that carry a cash value far higher than his or her equity in the homes. This is unique among asset classes, and any investor who wants to expand their holdings should examine real estate.
To further explore financing options and hundreds prevetted rental properties, register on HomeUnion®’s site. Using a combination of on-ground research and deep data analytics, HomeUnion® brings investors a selection of properties in the nation’s best SFR markets. With HomeUnion®, profiting from SFR investing is as easy as investing in stocks.