One of the most important aspects to investing in real estate is how you finance your property. Although all other factors may look favorable, having no or little access to good terms could be a deal breaker. Therefore, before doing anything else, it is important that you begin to line up some potential sources and explore what options are available to you.
There are various ways to start investing in real estate, and each source has its own set of strengths and weaknesses. Your exit strategy, the condition of the property and various other factors will play a part in how you may be able to finance each specific investment. So let’s explore 3 of these top sources:
If one of your strategies is to buy, hold and rent, then using banks may be a safe bet for some of your investment properties. This is a source that can be considered up front when a property is in considerably good condition. Most banks will not support the financing of a fixer upper until repairs are completed, due to the amount of risk involved.
Therefore, you may need to spend a little extra time searching for those diamonds in the rough. Traditional financing is extremely favorable, because you can usually get some of the best interest rates, terms and closing costs when approved. The process certainly will take longer than using cash buyers or hard money lending for example, but it can be worth the wait.
Hard Money Lenders
For those who will either be flipping a property or would need to conduct significant repairs in order to refinance may want to consider building a relationship with a hard money lender. It is advisable to shop around to at least 2 or 3 in your area when possible to see which terms you find to be most favorable.
These loans will come with much higher interest rates (typically 12% or more), points and some type of balloon payment near the end of the agreement. Hard money may be offered for 6 months to a year while the repairs are made, until the home is ready to be sold or refinanced for better rates.
It is important that those investing in real estate are prepared to either rent out or lease-to-own their property if perhaps the home is unable to sell on the market quickly enough. Also, newbie investors beware! Flipping houses can be more difficult that it may seem, and you must have a solid plan in place so that you are not forced into a tight financial situation.
Private Money Lending
Before ever considering this option, it is strongly encouraged that you talk with a local attorney that specializes in SEC policies. Laws can vary on a state by state basis, so it is important that you have a good understand of those guidelines before building any relationships with private lenders.
However, when done correctly this can be a powerful resource available to you, that doesn’t require credit checks or adhering to all the strict guidelines enforced on mortgage companies. Private lenders can be nearly anyone who has access to the necessary funds for your purchase (i.e. your doctor, friends, family, or investor club).
Typically private lenders can receive anywhere from around 9% and up for their investment, which is secured by the property and can be a great investment for them based on today’s rates. Loans can be negotiated on a property by property basis so that each investor only funds the deals that they are comfortable with. Becoming a private lender is a great way to invest passively in real estate without the headaches of being a landlord, rehabbing or selling properties.
With these 3 examples alone, you may have all that is needed to find funding when investing in real estate. Therefore, take action now and begin building the relationships and networks of lenders that you will need in order to start investing.