Investment real estate is a strategic way to build your long-term financial portfolio. If you’re just getting started on your investment journey, determining how you should finance your prospective purchase is crucial. There are several options available to you, with each presenting advantages to different situations. Today, we break down the loan options for investment properties in Philadelphia.
Distinguishing Property Types:
To understand loan options, we first must understand how residential housing is categorized. There are three primary categories
Primary Residence: This is the residence where you primarily live. For a home to be considered your primary residence, you don’t need to live there year-round. However, you can only have one property considered your primary residence at one time, and it should be for all intents and purposes, your main home.
Second Home: If you own another property that you occupy for parts of the year, it is considered your second home. To clarify, you can have mutiple second homes, as long as you occupy them for some portion of the calendar year each year. Common examples of second homes include seasonal homes and vacation homes.
Investment Properties: Finally, we come to investment properties. These are residences that you don’t ever occupy and exist solely as a way to generate income. There are ways to utilize a primary residence as an investment property, such as in the case of house hacking, but usually, your investment property will be entirely separate from your residence.
The Loan Options Available for Investment Properties in Philadelphia
When it comes to loans for investment properties, there are a few different options you have at your disposal, each fitting some circumstances better than others. Let’s take a look at those.
Traditional Bank Loan
If you’re already a homeowner, this is the option you’re probably most familiar with. Like financing your primary residence, you have the option of securing a traditional bank loan for your investment properties in Philadelphia. This is a straightforward option and requires much of the same financial information you had to provide for a home loan, including credit score, debt-to-income, W2s, tax records, etc. Finding the right loan for an investment property can be challenging, which is why working with a qualified mortgage broker may be the right step for you. Brokers like those at the Federal Hill Mortgage team can help streamline the process and have existing relationships with lenders that allow us to help negotiate better interest rates and mortgage terms. If you are looking to purchase an investment property, have strong financial standing, and are not looking for a fixer-upper, a traditional bank loan is likely the best option for you
If you like the idea of property investment as a building block for your financial future, but don’t want to hassle with landlord duties or property management companies, fixing and flipping may be an option worth exploring. This is the process of purchasing outdated, damaged, or even vacant properties, remodeling them, and selling at a profit. If you have construction experience and can handle the remodel yourself, this is an even more effective method. If you are hiring a remodeling company, ensure you budget carefully to guarantee that the remodel won’t cost more than you can earn by selling the property.
If you want to purchase a property but aren’t sure if you can finance the remodel, a fix-and-flip loan is a great option to explore. A fix-and-flip is a short-term, hard money loan meant to help you finance the remodel and flip the property for a greater profit. A hard money loan essentially just means that the loan is backed by the property itself. There is more flexibility within these loans than traditional bank loans, mainly because lenders may be more focused on the potential profitability of the property than solely on your financial standing. Though, those items will still be of interest. Lenders estimate the after-repair value (ARV) to determine whether or not the property is viable for a loan. The biggest downside of fix-and-flip loans is that interest rates are often far higher than those of conventional loans.
Accessing Home Equity
You’ve probably heard that tapping home equity isn’t an advisable strategy outside of a few scenarios, including substantial home upgrades, and business investments. There are two ways to access your home equity to purchase an investment property, a cash-out refinance or a home equity loan. You may be able to access up to 80% of your home’s value to use towards the purchase of investment properties in Philadelphia.
With a home equity loan, your loan is secured against the equity of your home. You borrow a lump sum, which you repay back at a fixed rate. A home equity line of credit is similar, but you have flexibility in how you access the money. Instead of being given the lump sum all at once, you can choose amounts to draw monthly. If you’re still paying off your original mortgage, both home equity loans and home equity lines of credit act as second mortgages and will be paid on top of your existing mortgage rates.
A cash-out refinance on the other hand acts as an entirely new mortgage that replaces your current mortgage with a larger amount. The difference between your current mortgage and the refinanced mortgage is the cash-out that you receive. Cash-out refinances typically come with lower interest rates than HELOCs or home equity loans.
These are just some of the options at your disposal when you look to finance investment properties in Philadelphia. Navigating all of the options can be challenging when first trying to dip your feet into the investment realty market. Having a professional mortgage brokerage and lending team at your back can make all the difference. Federal Hill Mortgage is made up of the number 1 ranked loan originators on the East Coast. If you’re ready, apply today to get started.