A common dilemma for real estate investors revolves around the type of loan they should secure. Should it be a 5-year term, a 7-year term, or the stability of a 30-year fixed rate?
In this guide, we’ll explore the nuances of loan terms, deciphering the impact on interest rates and the potential for profitability over time.
Understanding Loan Terms
When considering loan options, the term refers to the length of time the interest rate remains locked in or stays the same.
While the idea of a perpetual 3% rate may sound appealing, banks operate on a risk-reward model. Shorter terms, such as 5 or 7 years, come with lower risk, but the interest rate may slightly increase.
Residential vs. Commercial Loans
For those just starting out with fewer than 10 properties, the possibility of a 30-year fixed rate exists. However, as investors delve into commercial loans, the terms often shrink to 5 or 7 years, with rare instances of a 10-year term.
The 7-Year Strategy
Experienced investors often opt for a 7-year term due to its strategic advantages. As equity builds up through appreciation or rent payouts, the goal is to leverage that equity for future investments. With a 7-year term, there’s a sweet spot for refinancing, allowing investors to capitalize on increased property value and accumulated equity.
The decision between a shorter or longer-term loan ultimately boils down to the investor’s risk tolerance and long-term goals. While a 30-year fixed rate may seem stable, the opportunity to refinance and extract equity becomes a critical consideration.
The Refinancing Game
Every real estate investor knows the importance of staying nimble in the market. Refinancing is a key strategy, but the effectiveness of a 30-year fixed rate diminishes if market conditions lead to lower interest rates.
The sweet spot often lies in the 5 to 7-year range, offering enough time for equity to accumulate and strategic refinancing.
Conclusion
In the dynamic realm of real estate investing, choosing the right loan term is a pivotal decision. Whether aiming for stability with a 30-year fixed rate or leveraging the strategic advantages of a 7-year term, understanding the risk-reward dynamics is crucial.
For those seeking guidance on real estate investments, including choosing the right loan and term, Profitable Properties Boston is your go-to brokerage house. Specializing in investment properties, we’re here to help you navigate the complex world of real estate financing and propel you from one property to wealth.
Trust Profitable Properties Boston to be your guide in transforming your real estate investments into lasting wealth.
