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A loan on secured by real estate
collateral is typically known as a mortgage. This is the most
popular form of real estate investment loan used by investors.
Real
estate investments provide an opportunity to generate
cash flow. Apart from commercial banks, savings banks, savings
and loan associations, credit unions, real estate investment
loans can also be obtained from insurance companies, mortgage
bankers, mortgage trusts, investment trusts, pension funds
and finance lenders. Private individuals sometimes offer real
estate investment loans as well.
There are 2 types of real estate investment
loans —
residential loans and commercial
loans.
Property that is solely used
for business purposes like malls or industrial parks would
be termed as commercial real estate. Commercial loans include
buildings, warehouses, and stores. These properties are generally
5 or more units. Property that is solely used for single unit
housing purposes is termed as residential real estate.
Residential loans include those
properties that are bought for rental income and future appreciation.
The borrower initially receives a lump sum from the lender,
which has to be paid back in installments. To purchase a residential
property involves having significant funds. Before a loan
is granted the 3 main factors that are considered are, the
investor’s income, credit scores and reserves. In order
to get a loan there are 5 basic essentials, which are interest
rate, terms, payment, final value and principal. Loans can
carry a fixed interest rate or rates that vary with market
conditions. Some loans have negative amortization periods;
investors should be careful of such loans.
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Real estate investment loans consist of interim
loans, short-term loans and long-term loans. Apart from commercial
and residential loans, the other types of loans that are offered
are construction debt, permanent debt, equity financing, structured
financing, interim financing, mezzanine financing, foreclosure
investor money, hard money loans and residential repair funding.
Investors may not need perfect credit scores
to qualify for real estate investment loans. Bad credit real
estate loans are designed for those individuals who have a
less than perfect credit report. It is a type of sub prime
mortgage and is a higher risk to the mortgage lender because
of the past credit history of the borrower. Bad credit loans
allow individuals to obtain a mortgage for buying real estate
when other more conventional mortgage lenders or banks may
have turned them down.
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The longer the tenure of a loan; the higher
the rate of interest will be. A 30 year fixed loan will have
a higher rate of interest than a 2-year fixed loan. But people
generally opt for a loan with a shorter-term fixed option,
as the rate of interest is lower and hence the monthly payment
is lower. To get a loan there are no pre-determined limits
set for the real estate investor.
Some real estate investors tend to prefer
in marketable real estate assets. Buying shares in a REIT
(Real Estate Investment Trust) is one way to do this. Investment
loans can be use to partially fund such investments and the
REIT shares are used as collateral to secure such loans.
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