t’s a struggle real estate investors have always dealt with, and for many it’s just another cost of doing business.
But what’s actually behind the expense? Why do savvy real estate investors need to pay more than the average Joe buying a house on Main Street?
The main gist is that investment loans are riskier to lenders. Here’s a little more detail on why:
1. Your income relies on the property
One of the biggest problems is that your income is directly correlated to the property you’re purchasing, and its future profitability can’t be easily predicted or guaranteed. If that investment goes south and you’re not able to reap the returns you were hoping for, you might not have the financial means to keep paying your loan. This presents an added risk for the lender. Charging more in interest helps protect against this risk and cushion the blow should things go awry.
2. You don’t plan to live there
When you live in a property you’ve mortgaged, you’re less likely to up and abandon ship when the going gets tough. In most situations, you’d probably do all you could to make those mortgage payments and avoid losing your house.
With an investment property, you don’t have as much of a personal stake. Sure, you want to make money off the home, but your physical safety and security (or that of your family) doesn’t depend on it. This makes you more likely to bail on the home -- and its attached mortgage -- when finances are tight (or even if it’s just not producing the income you set out for).
Because of this, lenders are usually more cautious when financing a property you’re not planning to live in, and that shakes out to a higher interest rate and stricter qualifying requirements.