What's the difference between a real estate investment loan and housing loan?
Some of you may be researching real estate investment and are wondering about the difference between real estate investment loans and housing loans. Real estate investment loans are for the purchase of income-producing real estate for the purpose of earning rental income. A housing loan is only applicable to the property that will become your home.
Although they may seem similar, these two loans are completely different financing systems. By knowing the differences, you can choose the right loan for your purpose. In this article, we will introduce the differences between real estate investment loans and housing loans and how to utilize them.
The main difference between a real estate investment loan and a housing loan is the purpose of purchasing the property: whether you will rent it to others to earn income or live in it by yourself. Based on this purpose, there are various differences. Let's take a look at the six differences here.
Purpose of Loan
A housing loan and a real estate investment loan may seem like similar loans when you think of them as being used to pay for the purchase of a property. However, the purpose of using the property for the loan is different.
A housing loan is a loan to be used for the purchase or expansion of a home. The purpose of the loan is to cover the cost of the home in which the borrower lives. It cannot be used to cover the cost of purchasing a property for the purpose of renting it out.
A real estate investment loan is a loan that is taken out to generate income through real estate investment. When purchasing real estate for profit, you need to take out a real estate investment loan instead of a housing loan.
Financial institutions' screening criteria are also based on the intended use of the property. Taking out a housing loan to pay for the purchase of income-producing real estate is a serious breach of contract.
Source of Repayment
There is a difference between a housing loan and a real estate investment loan in terms of what is used as the repayment source. The repayment source is the money that is used to repay the loan. The source of repayment for a housing loan is generally your monthly salary. In the case of a housing loan, which is a loan for a house, the repayment source is generated from the income from the individual's labor.
A housing loan is a loan for personal consumption only. The concept of repayment source is basically the same as other personal loans.
In the case of real estate investment loans, on the other hand, the source of repayment is the monthly rental income. In the case of real estate investment loans, which are loans for income-producing real estate, the repayment source is generated from the rental income earned from tenants through rental management. Even if you are an individual investor, it is assumed that you will be running a business called rental management.
There is also a difference in the loan amount. The maximum loan amount is higher for real estate investment loans than for housing loans. The difference is whether the loan is for an individual or for a business investor.
The maximum loan amount for a housing loan is 5 to 8 times the individual's annual income. In general, the upper limit is 5 to 6 times, but it can be 7 to 8 times depending on the individual's attributes.
The maximum loan amount for real estate investment loans is sometimes 10 to 20 times your annual income. The reason for this amount is that not only rental income but also salary income and savings are taken into account.
Interest Rates on Loans
There is a difference between housing loans and real estate investment loans, not only in the loan amount but also in the interest rate of the loan. The interest rate is usually higher for real estate investment loans than for housing loans. This difference is due to the difference in the risk of loan default.
The interest rate on housing loans is about 0.5%~2.0% per year. Salary income will not decrease significantly as long as the individual continues to work. Housing loans that use salary income as the source of repayment can be said to have low interest rates due to the low risk of default.
The interest rate for real estate investment loans is about 1.5%~4.5% per annum. If the loan amount is large, the repayment amount will also be large. However, rental income, which is the source of repayment, may not always be constant. Vacancies and declines in rent can occur, increasing the risk of default.
For this reason, interest rates tend to be lower on real estate investment loans for properties that are expected to generate stable income.
Details of Loan Screening
There is a difference in the loan screening process between home loans and real estate investment loans. The difference can be described as whether to look only at the creditworthiness of the individual or also at the profitability of the property.
In housing loans, personal attributes are the criteria for loan screening. Attributes are related to an individual's repayment ability and creditworthiness. Specifically, they include annual income, length of service, amount of savings, amount of debt with other companies, and history of financial accidents.
In addition to personal attributes, real estate investment loans carefully check the profitability of the property. This includes the area in which the property is built, the age of the property, the rent setting, and the history of past property transactions. The type of property you choose will also affect whether or not you can get a loan.
Different financial institutions have different standards for loan screening, so even if you don't pass the screening at one bank, it is possible that you will pass at another bank.
Housing loans and real estate investment loans differ in whether they can be signed in the name of a corporation or not. The property for which the cost is covered by a housing loan is supposed to be occupied by the contractor. It is a loan for the home and cannot be signed in the name of a corporation.
The property you purchase with a real estate investment loan is operated for rental management, where you rent it out to tenants and earn rental income. The loan is for the business of earning real estate income, not salary income, and can be contracted in the name of a corporation.
There is also a difference in the age limit of the contractor. For housing loans, the source of repayment is usually salary income. Taking into account the retirement age, the upper age limit is set at about 65~70 years old.
In real estate investment loans, the source of repayment is the rental income from rental management. Depending on the profitability of the property and your asset status, you may be able to take out a loan at the age of 70 or older.
Will I be able to get a housing loan if I have a real estate investment loan?
Let's also look at whether taking out a real estate investment loan will prevent you from getting a housing loan. As mentioned above, real estate investment loans can be as high as 10~20 times your annual income.
The state in which you are taking out a real estate investment loan is one in which you have a large amount of debt from other companies. Financial institutions that screen housing loans determine the repayment ability of individuals. The general perception may be that you are likely to fail the loan screening process because you are already approaching the upper limit of your repayment capacity.
It is not easy to get a loan approval, but it is possible to get a loan depending on the conditions. The maximum amount for a home loan is 5 to 8 times your annual income. Within this amount, as long as the repayment ratio of the two loans combined is not too large, you can get a loan.
The repayment ratio is the ratio of annual repayment amount to annual income. Some financial institutions consider real estate income to be combined with salary income.
Although there are no fixed standards for loan screening, the larger your real estate income, the more favorable your loan screening will be.
Which should you buy first, your home or your investment property?
If you want to get both a real estate investment loan and a home loan, which one should you get first?
There could be a scenario where a person earns a profit from real estate investment and makes a good living, but lives in a rental house because he or she cannot get a housing loan.
It is only theoretical, but in conclusion, it is more effective to take out a real estate investment loan first.
When you take out a real estate investment loan to purchase income-producing real estate, you will receive rental income. Many financial institutions consider this income as annual income. Increasing your annual income will also lead to a higher maximum loan amount.
Buying income-producing real estate means that the maximum housing loan amount will naturally increase. On the other hand, if you take out a housing loan first, the loan amount for your real estate investment loan will be diminished because of the pressure on the loan amount.
However, it is difficult to say for sure, as each financial institution has a different approach to screening, and whether or not a loan will be approved depends on the individual's financial situation. If you are considering purchasing a house, it is recommended that you inform the person in charge of sales of your ideas.
Can I buy an investment property with a housing loan?
Some people may wonder if it is possible to buy an income-producing property with a housing loan. As we have mentioned, a housing loan is a loan for a property as a home. Basically, you cannot purchase income-producing real estate with a housing loan.
There are special cases in which a property purchased for one's own living purpose is consequently rented out to others. However, it is a breach of contract to use a housing loan even though you are supposed to be investing in real estate.
The financial institution checks for this breach of contract even after the purchase of the property. If you are found to have violated the contract, it is customary to pay the remaining balance in a lump sum. In the worst case, you may be charged with fraud, so be careful.
Why some people try to invest in real estate using a housing loan
A housing loan is a loan for a property for your home. Despite knowing this, there are still people who try to invest in real estate using housing loans.
The interest rates for housing loans are variable and range from 0.5% to 2.0% per year. Compared to real estate investment loans, where annual interest rates range from 1.5% to 4.5%, interest rates are low and screening standards are said to be relatively loose.
If you look only at the basic terms and conditions of the loan, such as interest rate and approval, housing loans are more advantageous. For these reasons, many people want to use housing loans for income-producing real estate.
However, borrowing a loan from a financial institution under the guise of a housing loan and using it for real estate investment is, of course, illegal. Even if the loan is approved, you may be asked to repay the loan in full if the forgery is discovered. Even if you are recommended by a real estate agent, do not go ahead with it.
In today's case, an investor residing in Asia established a corporation in Japan, opened a bank account, purchased a property, and rented it out.
Originally, the owner who liked Kyoto had a few real estate properties in Kyoto city under the names of individual and family. The properties were not investment properties, but a second homes for him and his family when he came to Kyoto.
We decided to put one of these properties up for lease, and since there was commercial property for sale in a good location for investment, he decided to increase the number of properties in Kyoto.
In this scheme, a non-resident investor establishes a corporation in Kyoto, purchases real estate in the name of a corporation, opens a new bank account in the name of the corporation, transfers the lease agreement to the name of the corporation, then receive the rent in new bank account. This time, we have not set directors’ remuneration yet, but it is possible to receive remuneration from corporations, and when traveling to Japan, airline tickets and travel expenses can be recorded as necessary expenses. Also, even if an officer inherits, the real estate in the name of the corporation will not be changed and the inheritance of shares will occur.
First of all, the establishment of a corporation requires a certificate of seal and signature of the investor. In countries with a seal certification system, documents can be prepared at the embassies or notary public offices of the countries of that nationality. You can also create a proof of signature at an embassy in your country. In some cases, a notarial deed may be required for the incorporation. If you have any questions, please contact us individually.
The position of the investor this time is to be the representative director and the investor.
We've registered an extra person as a board member, but having a local resident in the business with will make it easier to open a bank account and complete the necessary paperwork. Therefore, in this case, I am participating in the corporation as an officer. A corporate registration is the same as a real estate registration, where documents are prepared and applied for and registered through a judicial scrivener.
For real estate sales and registration, it does not matter whether you sign a real estate contract after the establishment of the corporation or establish a corporation after the contract is concluded. If you make a real estate contract first, the buyer's name in the contract will be the individual, and we will add "The Seller and the Buyer agree to transfer the buyer's position to a third party after the contract" to the special provisions. By doing so, it becomes possible to transfer the purchaser's position to a corporation that will be established at a later date, and to register the sales contract contracted by an individual in the name of the corporation.
As with the case of registering a earning property in the name of an individual, the procedure of taking over the lease contract is also performed at the same time when the real estate is handed over. The documents include notifying each lessee of the succession to the status of the property, changing the names of various contracts (high voltage power supply, air conditioner lease, internet, elevator inspection, notice to the management association, etc.), and entering into a new management contract.
At this point, the establishment of the corporation is completed, and all procedures are completed in the name of the corporation.
Also, regarding the opening of bank accounts, it is best to open it through a person who lives in Japan if possible.
Even by the representative director, if not the resident in Japan, the bank refuses the application for opening the account for some reason. There are many reasons for the bank to refuse, such as contact information not being in Japan, communication in Japanese not being possible, and address not being in Japan. Therefore, the easiest and safest way is to create a new bank account through someone who can conduct a credit check on the account opener conducted by the bank.
If you use this investment scheme that includes the creation of a corporation, you will be able to obtain a loan from a bank, a guest house license at a Japanese corporation, buy or sell a corporation, and get a visa for going and going.
These methods require a trusted partner, so please contact us directly if you are interested .
Arrows International Realty Corp.