Property investment finance
Investment properties are bought for generating rental incomes.These rental incomes supplement the pay packets during the working life, and become a major source of income on retirement.What is nice about the rental incomes is that they increase with time, just like annual incomes.When a person retires, the income stagnates.Inflation erodes this stagnated income.Therefore, it is necessary to have assets such as stocks and rent generating properties, which provide growing returns in the investment portfolio.Investing in stocks, though highly rewarding, is equally risky.This gives that edge to investment properties.Sometimes, however, investment properties such as parcel or lot of land is purchased with intention of constructing on it at future date.At other times, an individual may be buying such properties from unit trusts or co-operatives.
Unlike stocks, buying investment properties is not easy.For investing in stocks, small amount of funds is adequate.Investment properties are real estate properties, and therefore, they are expensive.Not everybody can spare or save to buy some investment property with own funds.Luckily, there are ample number of banks, credit unions, and lenders willing to finance purchase of investment properties.
Financing an investment property is quite like home loans.But lenders look for higher down payments, and charge higher interest on such loans.In addition, they may also stipulate more stringent income criterions for loan eligibility, even though this may seem to defy any business logic.After all, a person seeking to invest in investment property already has adequate to spare some amount for investment, and the bankers should be concentrating on making money.This is because the person who is buying an investment property is less likely to fear eviction, and is, therefore, more likely to default on loan repayment.
Individual seeking investment property finance should be very clear about the kind of loan that is required.The factors that come into play are
- Down payment
- Interest rates
- Whether fixed interest bearing loan or variable interest rates bearing loan
- Type of mortgage such as standard amortizing, amortizing equity, home equity credit (line of credit), or interest only types
- Loan tenure
- Quantum of loan
Buyer of any investment property should anticipate some repairs or additions to the property.Therefore, the quantum of loan being applied should be inclusive of some buffer.
When income is not adequate to obtain a sanction for this higher quantum of loan, the borrower may ask his or her spouse to join in and the collective incomes may be considered for assessing the loan repayment capacity.Income or rentals from investment property being acquired can also be added to obtain the required quantum of finance.
If the amount being sanctioned by the lenders is inadequate, the borrower may consider taking a line of credit on existing residential or other properties.If these properties are already mortgaged with lenders, then the borrower may seek enhancement of the existing loan.Funds obtained from these sources can be used to acquire a new investment property.
The lender will obviously examine
- Income of the borrower
- Borrowers rights and title on the investment property
- Quantum of monthly installments that the borrower can easily manage
- Credit record of the borrower.A borrower with impeccable credit record is a coveted customer  so the borrower must take pains to put the credit cards and other credits in order before approaching the bank, credit union or lender.
- Quantum of loan being sought by the borrower
Generally, however, an individual may be required to make a down payment of approximately 25 to 40 percent.
Interest rates differ from country to country, lender to lender, bank to bank.So there is no standard measure to assess whether the interest rates are right or not.Borrower should shop around and collect information from other individuals who have taken investment property finance.Information on these loans can also be obtained from real estate agents, mortgage brokers, financial advisers, and accountants.However, few of these professionals would examine the loans from borrowers perspective.At times, there may be a loan that appears to be costlier than the rest, but it may have some additional features that the borrower requires.Only a borrower knows whether he would require a loan that increases with time, or a mortgage on which he can gradually increase the installments.Therefore, the borrower should evaluate the information collected from all these sources to come up with the optimal solution.
All investment properties do not offer required returns.The location, infrastructure, employment opportunities, etc., play a large role in annual increase of rental values.So it is necessary to consult friends, relatives, professionals and colleagues before taking a plunge.Investor should also take pains to find the correct value of the property.Value of real estate properties are difficult to assess as there is an inherent appreciation, which is determined only at the time of transaction.There is every possibility that the buyer pays more.Therefore, the buyer must bargain for the best possible price.
Under no circumstances, investment properties should become the sole retirement income generating investments.Investment properties have their own drawbacks.After a decade or so, expenses on repairs start climbing.In addition, not everybody is cut out to be a landlord.Other Articles
