Pros & Cons of Income Property Loans
When you invest in an income property your overall credit is utilized to close on the purchase. Increased return on investment, keeping your assets liquid, risk reduction, operational management, tax deductions, improved credit scores, and accessibility are just a few of the main benefits of this strategy.
Pros & Cons of Buying an Income Property
So let’s discuss the pros and cons of buying an investment property. The choice will become easier to make after you have a good understanding of what they are and if you should explore utilizing an income property loan.
Pros
Purchasing an investment property has many benefits for the investor. Let’s discuss them.
Risk Factor
Income producing real estate is generally thought to be a lower risk investment due to usually stable price volatility. Higher returns on investment are prevalent when using the leverage of income property loans.
Extra Income
The main reason to buy an investment property is the extra money generated in the form of monthly cash flows. The income is primarily passive if the asset is in good shape and maintained on a periodic basis.
Good Return on Investment (ROI)
Real estate investments provides motivating returns on invested capital, or ROI. The buyer can use some of their own money as a down payment and obtain an income property loan from a commercial mortgage lender. You can anticipate having some money left over each month after covering expenses and the mortgage. The return on investment, or ROI, is the free net cash flow expressed as a percentage of capital invested. This return usually turns out to be effectively higher than if they had invested all of their own money to acquire the property.
Property Ownership
You own the property after paying off the loan. For many more years to come, it can still make money. Without a mortgage to settle, the ongoing income increases far more.
Equity Accrual
A portion of the monthly mortgage payment that you make goes toward reducing the remaining principal balance of the loan. In this manner, you gradually increase your income property’s equity each month.
Cons
Now let’s discuss some of the cons of buying an income property.
Property Devaluation
The possibility of your income property’s future reduction in value is one of the primary risks when purchasing income producing properties. It’s important to conduct thorough research into the potential growth of a property’s value and to seek the assistance of duly qualified real estate agents beforehand.
Vacant Property
The time it takes to replace tenants who have vacated can be a month or much longer. You still have to pay the mortgage, taxes, insurance, and other costs even if the property is vacant.
Property Maintenance
Maintenance is a very important aspect of owning property. That means doing repairs, responding quickly to tenant inquiries, and handling problems with the plumbing, electricity, replacements, etc. This entire process takes time and money and often lowers your ROI. Sometimes the repairs will be expensive enough for you to have adequate cash reserves on hand.
Income Property Loans
Residential and investment properties have different mortgage application processes. That’s because income property loans come with a lot more requirements from lenders. Below we go over some of them.
Interest Rate
Mortgage rates for investment properties are generally somewhat higher than those for loans on principal residences. The primary explanation is that investment property mortgage default rates have always been higher. Additionally, lenders that loan money for investment property seek a greater rate of return as compensation for the added risk they take.
Higher Down Payment
Generally the purchase of an income producing property requires the buyer to make a higher down payment than that of a single family residence purchase. Income property lenders require more equity to be invested by the buyer which makes the income property loan more secure. The percentage of equity required is usually 25 % to 35 % of the purchase price.
