Leveraging and guarantees
Residential property investment is possible without massive savings. You may finance your investment property with a loan, provided that your finances are solid and you have had no previous issues with your banking matters. It is indeed a smart move to use moderate leveraging in order to make a bigger profit on your investment.
Financial institutions usually offer loans for investment properties because from their point of view, the investment is backed with solid collateral. Generally, the collateral value for the financing of an investment property is approximately 70%, depending on the location and the condition of the apartment. In other words, you should be able to finance about 30% of the apartment’s debt-free sale price yourself. Any housing company debts are included in the total price.
If you can provide other guarantees, it is possible to buy an investment property by using leveraging only. The guarantee may consist of your own, debt-free apartment or other assets that the bank approves as collateral value. When you have paid off some of the loan on your investment property, it provides more collateral for your next purchase.
Investment property loan
It is always a smart idea to ask for a quote from several banks. The costs of an investment property loan are comprised of the reference rate you choose, your customer-specific margin, and any bank fees. The most commonly selected reference rate is the 12-month Euribor. Customer-specific margins and other expenses may vary a lot between banks and customers. You will receive the best offer if you prepare carefully before the negotiations. Present detailed and realistic plans of your investment operation with estimated profits. You may apply for the loan before you even know what you are buying. This is usually a smart thing to do since good apartments are sold quickly. With a loan commitment secured, it is much easier to act quickly when a suitable property comes your way.
Protecting your investment from rising interest rates
You may also protect your investment property loan with various interest rate hedges or with a fixed rate. Hedges reduce the risk involved with a possible interest rate increase. A fixed interest rate provides you the opportunity to plan your investment operation and cash flow for several years onward. These protective measures always come with a price: a fixed rate is often higher than the current market rate. You can also protect yourself from interest rate increases. For instance, you may invest in investment products that make a profit on increasing interest rate.
Comparing loan interest rates
Suomen Rahatieto issues a quarterly interest rate comparison of investment property loans and housing company loans. For investment property loans, the collected data in this comparison is based on an investment property in good condition and located in the Capital Region. For housing company loans, the collected data in this comparison is based on an apartment building located in the Capital Region that has upcoming renovations planned. More information on loan interest rates is available here.
Leveraging housing company loans
With new construction, real-estate investors may finance their investment with the help of a housing company loan. If the housing company has entered its loan payments as income by way of capital expenditure charges, the payments are tax-deductible. More information on the right to deduct the charges is available here.