When executed properly, an investment property has the potential to propel you closer to achieving your financial objectives. While embarking on real estate investing may initially seem daunting, it could be the ideal choice for securing your financial future. Jia Finance will discuss some concepts of an investment property and the process of purchasing one to help you grow your portfolio.
3 TYPES OF INVESTMENT PROPERTY
For those new to real estate investing, the realm of real estate offers various avenues for investing your capital, and that choice depends on your objectives and financial resources. Let's explore each of these property types and their aspects:
- RESIDENTIAL INVESTMENT PROPERTY
Residential real estate pertains to properties designated for personal living. These properties are occupied by renting tenants. This category encompasses single-family homes, condominiums, apartments, duplexes, and townhouses. When investing in residential real estate, you will likely assume the role of a landlord. This entails renting out your investment property to tenants and being responsible for the maintenance of the building and the well-being of its occupants. If the prospect of addressing maintenance issues and screening potential tenants seems burdensome, you have the option to employ a property manager who can handle these tasks. However, it's important to note that hiring a property manager incurs additional costs.
Jia Finance specializes in creating loans for foreign national or local U.S. borrowers with the intent of renting properties.
- COMMERCIAL INVESTMENT PROPERTY
Commercial real estate encompasses properties utilized for retail or office purposes. This category encompasses various establishments, ranging from offices to shopping malls. Investing in commercial property shares some similarities with residential property investment. While you still lease out space to tenants, in this case, your tenants are businesses rather than individuals seeking residential accommodations. The rents generated by the tenant is predominantly tied to the prosperity of your tenant's business. If their business falters, your investment may suffer as well. Due to the intricate nature of the commercial real estate market, it typically recommended for experienced investors.
Jia Finance offers loans on properties backed by mixed-use. The defining feature of such properties is that its commercial usage is limited to 49% of the total square footage. The remainder 51% for residential purposes.
- LAND
Investing in land offers alternative opportunities beyond buildings, allowing for resale, rental, or development purposes. Raw land can be leased to farmers, sold to developers after enhancements, or developed by the investor themselves, requiring a more long-term commitment. Investing in land entails higher risk compared to developed properties as land may not appreciate in value over time and may not generate significant income. Assessing factors like location and type of land is crucial before investing. Raw land in a growing area can be a profitable investment if resold to interested developers. When developing land for its specific use (such as residential), one must seek permission from local authorities for zoning. Moreover, curating the land ripe for development can be a difficult task operationally (laying sewage, water, gas pipes, creating roads for inlets/outs, etc.).
CONSIDERATIONS FOR BUYING AN INVESTMENT PROPERTY
Before making any financial decision, it is important to weigh the pros and cons of investing in an investment property. It is crucial to carefully consider various factors before committing significant funds to real estate investment. Below are common points to consider, however it is recommended to seek advice from a legal or financial expert for personalized guidance based on your specific circumstances.
- DETERMINE PROPERTY & REALTORS
Determining the right type of investment property is crucial, as it should align with your goals. Based on one of the oldest adages, location significantly impacts real estate investments. High-demand areas tend to yield greater profits. Working with a real estate agent can provide valuable assistance due to their expertise in specific areas.
When buying or selling a home, you may consider hiring a realtor or a real estate agent. While these terms are often used interchangeably, there is a distinction between them. A real estate agent has a license obtained through state training and exams, enabling them to assist in buying or selling properties. On the other hand, a realtor is a member of the National Association of Realtors (NAR). They provide guidance in finding suitable neighborhoods, touring homes, ensuring fair pricing, making offers, and negotiating. If selling, they list your home on the MLS, market it, prepare for showings, and lead negotiations with buyers.
- FINANCING INVESTMENT PROPERTIES
Real estate investors often need financing to purchase properties. Depending on the type of property, the financing method may vary. For residential real estate, investors can get pre-approved for a mortgage loan. Lenders take on more risk lending to investors than to primary residence borrowers, leading to higher interest rates and down payment requirements.
- INVESTMENT RETURN METRICS ROI VS. IRR
Return on Investment (ROI) is a crucial metric for real estate investors to assess the profitability of investment properties. It enables investors to compare different investments and determine the potential profit margin based on comparable properties. Whether the goal is flipping homes or renting properties, ROI is a percentage that indicates the expected profitability in relation to the cost. Regardless of experience level, ROI is a valuable tool for real estate investors to objectively evaluate the profitability of potential investments.
ROI = (Investment Gain − Investment Cost) ÷ Investment Cost
The internal rate of investment (IRR) is commonly utilized in real estate to determine the approximate percentage of return an investor can expect on each dollar invested over a specific time frame. In essence, it provides insight into the growth of invested funds. Understanding the IRR is valuable for property owners as it helps them gauge the potential growth of their investment.
IRR formula is present in Microsoft Excel to do the work for us. Let’s break the formula down and make it understandable:
- NPV: The net present value (NPV) equals the current value of the flow of cash coming in and going out for a certain time period.
- N: Often representing the total number of years, “N” in the equation represents the number of periods during the evaluated time.
- Cn: The cash flow for the period at a certain point in the formula.
- r: “r” represents the IRR (the value the equation is solving).
- n: The period representing that step of the formula.
US MARKETS WITH HIGHEST AND LOWEST PRICE GROWTH
Based on recent data (March 2023) from Black Knight, markets with highest and lowest year-over-year home price changes are shown below.
HOW TO APPLY FOR AN INVESTMENT PROPERTY LOAN WITH JIA FINANCE
ONCE YOU’VE CHOSEN A PROPERTY TO PURCHASE, JIA FINANCE MAKES IT VERY EASY TO FUND THE ACQUISITION.
Here are some terms to be aware of:
- LOAN TERMS
Jia Finance offers loan terms of 15 or 30 year fixed and also offers adjustable-rate mortgages with 5/6 ARM, 7/6 ARM or 10/6 ARM. Moreover, the borrower can finance a loan with 10 years of interest only payments (IO).
- CREDIT SCORE OR FOREIGN CREDIT
For US residents, Jia Finance requires FICO scores from at least 2 credit bureaus. The minimum credit score is 620, bear in mind higher FICO scores result in better interest rates. For international buyers, in lieu of a US credit score, a foreign credit report or letter of credit displaying open tradeline activity is required. In cases where the language is foreign, Jia Finance needs English translation.
- DOWNPAYMENT
The minimum downpayment for a US investor loan is 20% and the minimum for a foreign national is 25%. The higher the downpayment, the lower the interest rate.
- ASSETS
Asset reserves are required for both us domestic investors and foreign national investors. Though the requirements differ, for local investors reserves are typically 2 months and foreign national investors its 12 months. Assets belong to the buyer and are required present in bank account at the time of underwriting, they're not required after the loan closes. However if the borrower decides to move the reserve money to a different account, they should be prudent in meeting their debt obligations.
- PROPERTY APPRAISAL
Appraisals are the most important when valuing the property and its ability to generate rental cashflows. The added benefit of the appraisal is conducted by an independent 3rd party who is licensed and certified by the state and it provides a level of guidance to the buyer’s purchase price.
Apply for a loan with Jia Finance