Every time I walk by an abandoned storefront downtown, I think about buying it for cheap and turning it into a thriving (and profitable) coworking space. However, I know I don’t have the capital available for such an investment.
One way to get the money needed is to borrow it. An investment loan can provide you with what you need to buy and fix up a property, or grow your existing business. Here’s what you need to know.
What is an investment loan?
“These are loans designed to help you fund a potentially profitable project,” said Paul Koger, the founder of investment website FoxyTrades. “They can be a great tool to help you fund the growth of your company or your wealth.”
He said some of the most common uses for investment loans include:
- Buying an investment property (usually meant for rentals or commercial businesses)
- Purchasing equipment needed for your business
- Building a factory
- Buying a competing company
Most people and businesses don’t have the cash available to make such large purchases. With the help of an investment loan, it’s possible to get what you need to move forward without needing to come up with the money entirely on your own, said Koger.
How much can you borrow?
Kroger said there are lenders willing to offer investment loans to finance 100% of the project. However, such lenders can be hard to find. Instead, you’re more likely to receive up to 70% of the money needed for a purchase, he said.
For example, if you wanted to buy a fourplex property for $500,000, you might be able to borrow only $350,000, which means you have to come up with $150,000 for a down payment.
If you have a healthy rental business and are adding to your empire, you might be able to come up with the necessary down payment. But that might be challenging if you’re starting out and need money to expand.
In those cases, it can make sense to look for a lender that’s willing to accept a lower down payment, even though it might mean you’ll pay a higher interest rate.
What are the eligibility requirements for an investment loan?
For the most part, traditional banks go through a process of due diligence, meaning you’ll face credit and income requirements, Koger said. Each bank has specific eligibility requirements. The process is a little different from getting a home mortgage, whether you’re buying a rental property, hoping to purchase commercial real estate, or trying to upgrade your factory with the latest equipment.
On investment loans, your repayment term is usually between five and 15 years, according to Koger. The shorter term is in contrast with a residential mortgage, where you can get a 30-year loan with smaller monthly payments.
“Banks will forecast the potential success of your project and your ability to repay the loan within this shorter time frame,” Koger said.
Alternatives to an investment loan
If you can’t get an investment loan from a bank, you can try going around the traditional system. Here are two viable alternatives:
1. Hard money loans
One way to get approved for a loan, if you can’t meet the criteria set by traditional lenders, is to turn to a hard money lender, said Aaron Norris, the vice president of The Norris Group, which specializes in real estate investment.
“Most of our borrowers don’t exactly look perfect on paper, and the inventory they are buying typically doesn’t look that great, either,” said Norris. “But we offer asset-based loans, lending primarily based on the asset’s value from a business perspective.”
Hard money lenders and other nontraditional lenders typically can also get you the money faster than traditional banks — usually within a week or so, according to Norris.
Once you get into the world of hard money investment loans, it’s important to focus on your plan for profitability and show lenders that you can deliver. It’s less about an underwriting formula, as with residential home purchases, and more about your ability to show the lender that you have a solid business plan and your investment will provide the returns you need to remain profitable and repay the loan.
However, understand that some hard money lenders can be quick to repossess your property if you fall behind on payments. Plus, you need to consider interest charges. The National Association of Realtors says you could face interest rates of 12% to 21% on a hard money loan.
2. Personal loans
It’s also possible to use an unsecured personal loan to make an investment purchase. However, it can be difficult to get the funds you need for a big project.
For example, you might be able to get a personal loan of up to $20,000 to upgrade the office equipment for your business. However, many personal loan lenders won’t offer more than $100,000 to renovate a rental property or buy an office building.
Depending on the purpose of your investment loan, it can make sense to get a personal loan — especially if the amount you need is relatively small and your good credit qualifies you for the best interest rates, which sometimes can be below 10%.
That rates can make a big difference, especially when compared to those on a hard money loan. For example, if you borrow $35,000, here’s what you’d pay with a hard money loan at 15% for five years, according to our personal loan calculator.
Compare that to a loan through a personal lender with a rate of 6.5%.
As you can see, you could see a lower monthly payment and save money in interest charges by getting a personal loan for smaller investments.
When should you use investment loans?
If you want to grow your business or wealth by buying property, a loan can be a great way to get the funding you need, Koger said.
However, before you sign on the dotted line, make sure you have a plan for making a profit, and that you can afford the monthly payments. Compare the rates and terms you can get on a personal loan with a traditional bank, and consider a hard money lender only if you can’t qualify for other loans.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|