Real estate or purchase of property is one of the many preferred forms of investment. Conventionally, people choose to invest in property as it comes across as a ‘safer’ option, guaranteeing steadier returns as compared to the volatile stock markets.
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Why Consider Financing Property for Investment?
Often it might appear that investing in real estate is not all that lucrative as market forces affect these too. But it must be kept in mind that in real estate, there is always the potential for steady returns, especially if you are considering renting the property. Also, if the market appreciates at a steady rate, the value of the purchased property will appreciate accordingly, giving you much higher returns on your investment.
One thing to keep in mind however, when considering financing a property for investment in the long-term and short-term impact the borrowing will have on your finances. Evaluate the loan amount you need, the interest rate on the loan and the EMI you will need to pay as part of repayment. Then choose the loan which is ideal for your financial situation. In the next section, we will look at the different options you can explore to finance an investment property.
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Options to Finance Investment Property
There are various sources from where you can consider financing your investment property if you do not have adequate funds to make the purchase in one go. Let us look at these various options:
- Conventional bank loans
The most preferred financing option across the board, conventional bank loans come with clear terms and may let you avail as much as 100 percent of the value of the property you are considering purchasing. Banks are now processing approvals faster with minimal documentation and faster fund disbursal. However, with bank loans, your prior credit history may become an issue and sometimes, lack of a good credit score may lead to denial of a loan.
- Digital fintech companies
In the age of technology, even loans have become available through mobile apps and websites. If you are looking for funds to top up your savings for investing in property, a quick instant personal loan, like one from PaySense, could be a good choice for you. These loans are often borrowed at low-interest rates and have flexible tenures, though the funds under the same might not be a lot.
- Private money lenders
For people with a poor credit score looking to obtain financing for the purchase of the real estate, private money lenders may also be an option to explore. In this case, the lender will give you the required funds in lieu of the property you are purchasing as the collateral. In case you default on payments, the lender can also claim rights on the property.
- Seller financing
Many real estate developers also provide financing services to buyers. These loans are usually in the form of a contract with clearly spelled out obligations of both parties. When obtaining seller financing, remember that you can negotiate for the best terms on the interest rates and also obtain up to 100 percent financing in certain cases.
Tips to Finance Investment Property
When financing investment property, it is important to keep a few things in mind to make sure that your money is spent in the right way. Here are some tips on financing investment property if you are venturing into it for the first time:
- Evaluate why you are investing in property
There are several reasons you could be investing in real estate. A good idea to start when looking to finance investment property is to evaluate the purpose for which you wish to invest. It could be for retirement planning, for wealth creation, or for steady alternate income generation in the form of rent. Depending on the purpose, choose the right property type for you.
- Consider closing existing debts
When looking for external financing for an investment property, a good idea to become more lucrative to lending institutions is to close your existing debts. If you have a high debt-to-income ratio, it will adversely impact your credit statement and banks and lenders might be hesitant to give you a loan. Even if you do manage to obtain a loan under such conditions, you might have to pay higher interest rates as compared to the average rates.
- Calculate how much you can afford to repay monthly
Go over your finances and calculate how much you can set aside for the payment of loan installments monthly without hitting your regular expenses and savings. Take into account your existing debts and credit card payments as well and savings. Based on this, determine the budget for the purchase of your investment property and seek a loan accordingly.
- Choose the right property at the right price
If you are buying a property for investment, it should generate good returns for you. Especially when you are financing an investment property, choose an asset which will increase in value over the years, generating enough money to not just cover your initial investment but also leave you with a tidy property when you are ready to sell the property. You don’t necessarily have to buy residential property and can also invest in commercial properties which tend to be more expensive but also generate much higher rents and resale values.
- Research the best financing option for you
As explained in the previous section, there are different financing options available to those looking to purchase real estate for investment purposes. Your particular financial situation will play a significant role in determining which type of financing is most viable for you. If you have a good credit history and score, obtaining a bank loan at competitive rates will be a lucrative choice as you may be able to obtain almost 100 percent of the cost of the property you intend to purchase. For people with low or no credit histories, private lenders and seller financing might be a worthwhile financing option.
- Get enough funds for the down payment
When you are purchasing an investment property, depending on the type of loan you obtain, it might be the case that you will not get 100 percent financing for the entire value of the property. In such a case, you will need to set aside some money from your savings or other sources for the down payment.
- Consider different lenders
If you are falling short of adequate funds to finance your investment property, an attractive option is to consider different lenders. In this case, even if you are unable to obtain all the funds from one lender, you can obtain the rest from the other source. However, be certain that your finances are secure enough to take on the burden of multiple lenders. Also, be extremely cautious in going through all the terms and conditions of each lender to get the most out of your external financing for your investment property.
- Use the equity from another property
If you are already the owner of some property, such as a house, you may consider setting it up as equity to finance your investment property. Banks and lending institutions are now considering financing against the borrower’s existing property, in which the borrower can use leverage to obtain funds for the purchase of a new property for investment.
- Find an investment partner
If you think you cannot finance the investment property by yourself, you could consider going into a partnership with a person you trust. An equity partnership is a preferable option, but you could also go in for more partners. Along with the joint investment in the property, you can also obtain the loan as joint borrowers, which will also reduce the burden of repayment on you as a single borrower.
- Keep an eye on the market
When researching the purchase of an investment property, keep an eye on the prevailing market forces and the predictions for the area you are looking to invest in. This step becomes all the more significant if you are financing your investment property as it would be ill-advised to purchase an investment property in an area that will see a downturn in the property market or where the appreciation will be slow.
Financing an investment property may seem daunting or even financially unsound, but if you research adequately and take all the right steps, you will be able to pay off your debt easily and break even on your investment while also making the best of tax breaks given by the government. Whether you want to generate additional income or plan for retirement, external financing for your investment property is a great idea to invest your money in the right place for steady and guaranteed returns.
To obtain instant funds to finance your investment property, download the PaySense app. With the PaySense app, check your eligibility, calculate your EMI with the EMI calculator feature, and get a loan up to Rs 5,00,000 processed in hours. For more information, write to [email protected].
Aahna Gandhi is an enthusiast traveller, writer and a PR Professional. She likes sharing memorable moments from her travels and inspire others to live a life full of wonder. Known for her content, she has worked for travel, technology, lifestyle, health sectors as well as finance.
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