Investor loans are loans that are extended for the purpose of funding the acquisition of an asset that is expected to earn some sort of return within a short period of time. In many cases, an investor loan is structured as short-term debt instrument that provides a relatively low rate of interest, a characteristic that in turn increases the profitability of the arrangement for the debtor. If the investment is expected to take a longer period of time to post a profit, the loan may carry repayment terms of anywhere between five to thirty years. While investor loans may be granted for a number of different investment opportunities, loans of this type are commonly used for the acquisition of investment property.
The use of investor loans is somewhat common in the real estate investment strategy known as flipping. This investment opportunity involves purchasing a commercial or residential investment property, making upgrades and repairs to the interior and exterior areas of the building, landscaping the grounds, then reselling the property at a profit. Professional short-term flippers will use investor loans to purchase the property and pay for the materials and labor required to increase the value and desirability of that property. Once the upgrades are completed, the properties are sold at prices that are sufficient to settle the loans in full.
As part of the flipping process, the resell prices are set at a level that allows flippers to not only pay off any investor loans associated with the projects, but also earn a significant profit from those ventures. From time to time, a flipper may be able to restore a home or commercial office building in less time than originally envisioned, and possibly bring the project in under budget. When this is the case, the property is sold sooner than originally planned, and the investor loan is paid off early. Depending on how the loan is written, this may reduce the amount of interest due, which only increases the amount of profit realized on the real estate deal.
Investor loans often require some type of collateral. With a real estate investment, the property slated for renovation may or may not carry a market value that is sufficient to justify the amount requested by the loan applicant. When this is the case, the investor may need to pledge additional assets as collateral in order to obtain the funds needed. Doing so helps reduce the risk to the lender and may aid in securing a more competitive rate of interest for the duration of the loan.