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What are Real Estate Investor Loans?

Scholasticus K Jun 18, 2019
This story, gives an insight to the concept of loans for investors in real estate. To know more, read on.
Real estate is a market where prices are always on the rise. There can be some downfalls for a specific time, but in the long run there will always be a rise. The logic is simple. Human population is rising, and the total volume of land remains the same (ruling out the reclamation from sea which is very small) against the growing population's need for land.
Thus, the increasing demand tends to escalate the price of real estate. More the population, higher the cost would be. Thus, by sheer common sense we can say that, investing in real estate would always prove to be a profitable affair.

What Are These Loans?

Investor loans for real estate, are commercial loans that are different from home loans or a mortgage for a house. These loans operate on the same mechanism as conventional loans, there are however, some differences.
In a real estate investing business plan, the borrower basically takes up a loan to purchase a commercial property, with a sole intent to make profit out of it, either by developing it and converting it into some business venture, or by selling it after developing it.
The land can be turned into housing projects or even an industrial belt. Basically, the business plan needs to be sound, so as to get a good loan. Real estate investor loan, in some cases is simply referred to as real estate loan. It is a big loan, that means the amount that is considered to be the principal amount is enormous.
Being a commercial loan, the interest amount often tends to depend upon the business firms credit standing, and a complex underwriting. But in usual circumstances, the rates of interest tends to be quite high.
In some case, the interest rate tends to be an ARM (Adjustable Rate Mortgage), where the rate of interest remains common or fixed for a certain time period, and after a stipulated time period it becomes an ARM.
And it varies according to an index (also known as ARM margin) such as the general real estate price levels of the said locality, or some economic index, or as per the profits that are being obtained through the investment.
In some cases, the lenders tend to keep the interest low and leave off some percentage of profit. But this totally depends on the lender and varies from person to person. The loan is of course secured, and is also charged a substantial depreciation while the price is assessed.
Due to all these complications, one important investing tip, is that the loan should be either taken from a recognized bank or from a lending or finance institute that is prominently recognized.

Underwriting Process

The process of real estate investing depends upon the process that known as underwriting. This process is used to determine whether the loans for investors should be approved or not, and if they are, at what rates should they be approved. In commercial real estate investing, the lenders go through this complicated process by considering theĀ given factors:
  • Current and projected net worth of the real estate
  • Proposed value addition and depreciation
  • Projected revenue out of the proposed project
  • Term and time period of recovery of cost
  • Other sources of income of the investor
  • Surroundings and environment of the property
  • Nature and quality of land
These factors are thoroughly considered in order to know whether the investor would be able to repay the said loan or not. The total interest that becomes payable is quite another issue, as several methods are used to compute it.
Overall, if you are planning to take up any of the loans to invest in real estate, then make an exhaustive and thorough analysis of the situation, as it can be a very risky deal because the principal amount involved is not small.