Investment Property Financing

The term investment properties refers to those real estate properties that are to be used for fetching regular income in form of rents, as well as generating some capital appreciation eventually. Therefore, the returns from investment properties are of two types; rentals and capital appreciation.

Rents are incomes that improve monthly cash flows, and are taxable according to receipt each year. Capital appreciation or capital gains accrue only when the asset is sold. Therefore, any tax on capital gains is payable in the year of sale. The purchase price of the real estate property is, however, adjusted using an index, to arrive at the correct amount of capital gains. In effect, the indexed cost of acquisition reflects the normal inflationary effects on the housing cost.

Different types of investment properties are available, including commercial establishments, malls, offices, shops, homes, agricultural lands, hotel properties, mines, properties facing sea, and so on. However, the investor intending to acquire these should have a clear idea about his future plans before venturing to purchase them as investment property otherwise he or she may be saddled with a property that is difficult to manage and doesn't fit into the overall plans.

Purchasing an investment property is advisable as they provide additional income during retirement. Rents increase with time, and therefore, rents become a good way to beat inflation. They can also be mortgaged to raise monies for any emergencies. However, investment properties don't come cheap. The purpose for which the real estate property is used defines whether or not the real estate property is an investment property and therefore the usual demand and supply applicable to every other real estate property applies to investment property as well.

Since cost of investment property is high, finance is required to purchase it. However, not many banks are willing to finance investment properties. This is because chances of an investment property purchaser becoming delinquent are higher. Therefore, bankers are reluctant to provide more finance for such purchase. In general, about 60 to 70 percent of the cost of the investment property can be obtained from banks and lenders, and the purchaser of the property has to raise the balance out of other sources. Even the interest rates charged by the banks are higher, and the period of repayment is also limited to 10 years or so. Effectively, the equated monthly installment payable by the borrower on financing of investment property is much higher. During the low interest regime, however, lenders were amenable to extend 100 percent finance for investment property. Therefore, a first time homebuyer could take get 100 percent finance for such properties, even if the intention was only to let it out. Lenders can also be agreeable for 100 percent financing of investment property if they are certain that the property being acquired is priced below the market price, and in worst case scenario, the actual value would be adequate to cover the amounts loaned by them.
One way to finance investment properties is to obtain a refinance an existing mortgage or taking an additional mortgage on existing mortgage. Depending upon the number of years since the start of the mortgage, and capital appreciation since then, this equity withdrawal can cover almost the entire down payment specified under financing for investment property. What is nice about such way of raising funds is that the interest on this amount is almost at the same rate as that on regular home loans. A better bargain would be extending the term as well, thereby lowering the installment on the existing mortgage so that the monthly outflows on the two mortgages can be easily managed. Rental income from investment property does add to the borrower's income, and therefore, makes the borrower eligible for higher amount of loan or refinance. Both the new and the existing lender take into account the rental income, and the payment record of the borrower while considering the request for income property finance, and additional loan as the case may be. The Journal of Property Investment & Finance discusses various sources for investment property finance especially the commercial properties.