Home Loan for Investment Properties: What to Consider

In India, an investment property refers to real estate purchased with the primary goal of generating a return on investment rather than acting as the buyer's primary residence. As a potential investor, you can buy properties such as residential apartments, commercial spaces, or land. The expectation is that you can rent it out and earn income from tenants or that the value of the property will increase over time. 

How to Finance an Investment Property

Financing an investment property can be achieved through various methods. Some unique ways to finance an investment property are cash purchase, home equity, real estate crowdfunding, government schemes, loans against investments like mutual funds or fixed deposits, etc. However, taking a home loan is one of the most common methods for financing investment properties in India. 

Today, several banks, NBFCs, and other housing finance institutions offer home loans at varying terms and interest rates. Some lenders may require you to pay a larger down payment on a home loan for investment properties compared to that for residential properties owing to the higher risk involved. You can explore multiple loan options from various top lenders on a single online financial platform like Bajaj Markets. 

Should I Take a Home Loan to Buy Property to Invest

Choosing a home loan can be a wise option for investing in a rental property due to the following reasons – 

• Leverage: 

By financing a significant portion of the property's cost with a home loan, you can own a substantial asset with a relatively smaller upfront investment.The returns on your investment will also increase if the property’s value appreciates, as you will earn profit on top of the buying price of the property.  

• Preservation of Capital: 

Using a home loan allows you to preserve your capital for other investment opportunities. Instead of tying up a large sum of money in a single property, you can also use the loan to invest in multiple properties or asset classes. This also eliminates the need to use your precious savings or other long-term investments for buying the property.

Related: What Happens When You are Unable to Pay Your Home Loan

• Cash Flow Management: 

Financing the property with a home loan also helps with cash flow management, as you can use the rental income to cover EMI payments and other property expenses. This makes it easier to manage multiple investments. 

• Tax Deductions: 

Under Section 24(b) of the Income Tax Act of 1961, the entire interest paid on the home loan for a rented property can be claimed as a tax deduction. This can be claimed over and above the standard deductions applicable, if any. 

• Inflation Hedge: 

Real estate is often considered a hedge against inflation. The value of the property and potential rental income may increase with inflation. However, financing the property with a fixed-rate mortgage will keep your borrowing costs fixed. Hence, your investment is likely to turn profitable over time.

Also check: 5 Tips to Get a Home Loan in India

• Portfolio Diversification: 

Using a home loan can help you diversify your investment portfolio by allocating funds to real estate. This can help spread risk and reduce the impact of poor performance in a specific asset class. 

Property Investment Through a Home Loan – Factors to Consider

When buying an investment property with a home loan, it's essential to consider several factors – 

• Condition of the Property: 

Assess the condition of the property. A well-maintained property may require fewer immediate repairs and can attract higher-quality tenants. Factor in potential renovation or improvement costs in the cost of your home loan for a balanced calculation. 

• Location: 

A desirable location comes with certain key factors that attract quality tenants and contribute to the property's appreciation. These include proximity to amenities, public transportation, schools, employment centres, and the overall neighbourhood. 

• Market Conditions: 

Assess the current and future real estate market conditions in the area where you're considering the investment. Look at trends in property values, rental rates, and vacancy rates. Consider the demand for the chosen property type in the local market before taking a home loan. 

• Rental Income Potential: 

Evaluate the rental income potential of the property. Research comparable rental properties in the area to determine market rental rates. Ensure that the rental income is sufficient to cover EMI payments, property taxes, maintenance costs, etc. 

• Loan Terms and Interest Rates: 

Explore different home loan options, interest rates, loan terms, and fees to find one that aligns with your investment goal. For example, fixed-rate mortgages offer stable EMI payments, while adjustable-rate mortgages may offer lower initial rates with a potential to increase or decrease in future. 

• Down Payment: 

Determine the amount of the down payment required by the lender. In general, larger down payments can lead to better loan terms and lower monthly mortgage payments. Assess your ability to provide a substantial down payment and how it impacts your overall investment strategy. 

• Cash Flow Analysis: 

Conduct a detailed cash flow analysis to ensure the property will generate profits. Consider all income sources (rental income, tax benefits) and expenses (EMIs, property taxes, maintenance) before signing on the dotted line. 

• Exit Strategy: 

Have a clear exit strategy. Consider whether you plan to hold the property for long-term appreciation, sell it after a certain period, or use it as part of a broader investment strategy. Having a well-defined exit plan can guide your decision-making. 

Before deciding to buy an investment property with a home loan, keenly examine these factors and see which of the abovementioned benefits you are ticking. Additionally, ensure that your investment aligns with your financial goals. Once you are sure, head over to Bajaj Markets and choose from multiple home loan partners. Get a high loan amount of up to ₹15 Crores and manage EMI payments easily with interest rates starting from 8.50% only!