Investment Property Loans: Expand Your Income Potential

Preparing for your future often means ensuring you’re financially stable, and sometimes that includes establishing an additional source of income. This money could be the difference between your child going to college, your ability to take frequent vacations or buying a lake house you can visit in the summertime.

One of your cashflow options is to invest in real estate. In addition to being a reliable asset and supplemental income, investing in property now can help you see long-term appreciation. As a portfolio suite loan, investment property loans offered by The Federal Savings Bank often come with additional advantages including working with a top bank with in-house operations and the ability to buy investment property in any state in the U.S.

If it’s your first time buying investment property, you may be wondering where to start. Take some time to learn what investing in real estate entails and how to start the process.

Why Invest in Property?

As either a seasoned or novice real estate investor, there are multiple reasons why property can be beneficial for you.  

Supplemental Income

One of the primary reasons many people invest in real estate is to have an additional source of income. Having money to fall back on if another source fails or significantly decreases is a smart fail safe to have. Additionally, real estate doesn’t necessarily involve day-to-day involvement, freeing up your schedule for other priorities.  

Portfolio Diversification

Real estate can help diversify your investment portfolio. Since it’s not greatly associated with other asset types, real estate can help decrease your investment portfolio volatility and can gain value even in market downturns. 

Tax Benefits

You may be able to take advantage of certain tax deductions, which can help you save some money. This can include mortgage interest, property taxes and depreciation. Before making any of these tax deductions, however, make sure you speak with a tax advisor first.

Types of Investment Property Loans

When you’re ready to finally start the process of buying an investment property, you may find that there are a couple of loan options you’ll want to research. 

Conventional Mortgage

One of the most commonly used loans for investment properties, conventional mortgages follow Fannie Mae and Freddie Mac guidelines and aren’t insured by a government program like the U.S. Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA). In general, these loans require higher down payments and credit scores and can have higher interest rates.  

Government Loans

Home loans that are insured by a government program include Federal Housing Administration (FHA) loans, VA loans and USDA loans. VA loans are limited to eligible veterans, active-duty military members and surviving spouses while USDA loans can only be applied to properties in certain rural areas. FHA loans allow borrowers with a 580 credit score or higher to make a 3.5% down payment while those with a credit score between 500 and 579 can make a 10% down payment.  

Cash-Out Refinance

If you already have a home loan and have been making mortgage payments for a while, you may have enough home equity to turn into cash. With a cash-out refinance, you’d be able to replace your current loan with a new one that has a larger loan amount, and you’d receive the difference in one lump sum at closing. Depending on how much you’re able to receive, you can put these funds towards your investment property purchase. 

Home Equity Loan or Home Equity Line of Credit (HELOC)

Another option to tap into your home equity is a home equity loan, a second mortgage that lets you borrow against the equity in your home. Similarly, a home equity line of credit is a type of revolving line of credit that lets you borrow against your home equity. However, HELOCs work in two phases. The first is the draw period in which you can withdraw money as needed for a set period of time and only pay back interest. The second is the repayment period in which you’d pay back the borrowed money with interest. 

Debt Service Coverage Ratio (DSCR) Loan

DSCR refers to the property’s estimated cash flow versus its ability to generate enough income to pay back the loan. Lenders who offer this type of loan will look at this ratio to help determine your allotted loan amount. If you’ve had difficulties securing an investment property loan because of your personal income in the past, you may be eligible for a DSCR loan.

What You Need for an Investment Property Loan

Some lenders have stricter borrower requirements for investment property loans. This may include higher credit scores, more cash reserves and proof of property management experience.  

However, at The Federal Savings Bank, we offer investment property loans with some favorable requirements, including a down payment as low as 10.01% which can be used for a variety of property types. Additionally, we may qualify borrowers who have a credit score as low as 660 if they make a 30% down payment.  

Our investment property loans are part of our portfolio suite so you can rest assured that only our professional mortgage team will work closely with your loan, receive quick loan status updates and be supported every step of the way. 

Are you ready to start investing in real estate? Get in touch with one of our mortgage bankers today.

This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner. For tax advice, please consult a tax professional.