Income property mortgage
What are income properties?
Income properties are those real estate properties that are bought or developed to generate periodical income by leasing or renting them. Some of them are used for capital appreciation. Generally, such term refers to residential income properties like apartment properties, single-family homes, vacation homes, etc., that are not occupied by the owner.
There are other income-producing real estate investments as well, like commercial offices, shopping malls, farms, vacant lands, etc.
Some income properties appreciate faster than others. However, the periodical returns from such properties may not be much. Others, like vacant land, take time to appreciate. Commercial properties carry their own inherent risk, but returns are high.
Why do borrowers invest in such income properties ?
There are seven main reasons, which prompt borrowers to invest in such properties.
a. Most of income properties generate monthly incomes, which can be utilized to pay monthly mortgage charges, if any, taken for purchasing the income properties. Therefore, interest cost of purchasing such asset is negligible.
b. Such properties serve as a method for speculation in real estate. Investors can park their funds, earning some nominal regular income by way of rent, till the property prices rise. Investors then resort to resale of the property and earn handsome profits. Sometimes, property prices do not rise rapidly enough. In such cases too, the investor can liquidate the asset and relocate or consolidate the proceeds with other assets.
c. Interest component in mortgage installments of residential properties is allowable as deduction against income in most countries. This becomes an attractive way to save taxes.
d. Since the properties would be sold at some day in future, capital gains tax is not a concern in immediate future. Unlike it, if the monies were invested in some deposits, the earnings thereon would be taxed with immediate effect.
e. Since income properties are real estate properties, a second and third lien on the property can also be obtained based on increase in value of the property. Amounts obtained from such liens are useful in emergencies or purchase of another property.
f. Investor gets to postpone taxes on his surplus funds if he invests in income properties as down payment for availing income property mortgage. If the borrower does not invest in this manner, he might become liable to tax on interest generated on such down payment amount.
g. Monthly incomes from income property supplement incomes. Therefore, it is a good retirement planning strategy as it mitigates the effect of inflation. Mortgage installments require some discipline. Therefore, the investor is forced to set aside the amount, which eventually helps him or her during retirement phase. If, however, investor were to opt for investing in stocks or bonds on monthly basis, few would be able to do it as systematically.
What is income property mortgage?
Basically, income property mortgage or investment property loans enable an investor to acquire income properties.
What are sources of income property mortgage ?
Banks, government agencies, and financial institutions are conventional lenders. However, private lenders also participate in such type of lending.
Duration of mortgage
Generally income property mortgages are of long duration. The borrower may even be penalized for pre-payment, in some cases. However, private lenders are open to lending for short-term. This is conducive to real estate speculation transactions. Interest rates charged by private lenders are higher.
Eligibility for income property mortgage
Investor?s income, age, income to debt ratio, value of existing assets, and credit scoring are factors that the lenders consider for granting income property mortgage. Rental incomes from the income property under consideration are also added to income.
Institutional appraisal
Bankers, financial institutions and government agencies also take into consideration the value of the property. In addition, they examine the condition of the property, and borrower ?s credit. Private lenders, however, confine their consideration to value of the income property under acquisition. Some private lenders do not even consider the borrower's income.
Quantum of loan that can be sanctioned:
After considering the property value, its appreciation potential, and investor ?s eligibility, some financial institutions, government agencies and bankers may be willing to lend almost 100 percent of the value of the property. That is loan to value of a 100 percent can be availed by the borrower from conventional lenders if he meets the eligibility criteria, and the property has the growth potential. However, private lenders give a maximum loan of 65 percent of the value of the property.
Rate of interest
Interest rates on income property mortgage are highly competitive. However, rates vary based on the type of income property and risks associated with it. Many commercial mortgage lenders in United States like Security Mortgage Group, East West Mortgage, Nationwide Mortgage, etc., offer such income property mortgage loans. Some of these are online lending companies. Conventional mortgage interest rates range from 7 to 10 percent. However, private lenders charge as high as 12 to 14 percent on first liens, and 14 to 18 percent on second liens.
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