For a beginner real estate investor, the first step towards buying real estate is financing. So, what are the best and the worst investment property financing options that you could go with as a beginner? Keep reading.
Financing a property is not all about getting the money even though it is the main objective of the whole process. But there are investment property financing options that are recommended, and others that are not. So, here is our list of financing options that you should go with and options that you should avoid:
Related: Real Estate Investing for Beginners: Methods of Financing Rental Property
The investment property financing options you should avoid
Conventional loans
Conventional loans are simply loans that you apply for at any bank for financing a business. But the thing that makes conventional loans one of the worst investment property financing options is the interest rate. The interest rates for conventional loans tend to be high depending on a few factors:
- The loan terms: This one is obvious. Therefore, make sure you check the terms and conditions of the conventional loan you are applying for.
- The loan’s length: The longer the loan, the higher the interest rate you commit to.
- The type of interest rate: Check whether the interest rate is fixed or adjustable. However, we recommend that you only sign up for a fixed interest rate so that you know ahead of time how much you are paying.
- The market’s performance: One thing you have to keep in mind that lenders take into consideration is future market forecasts. This plays a major role in the interest rate you pay on the loan.
- The borrower’s financial portfolio: This includes your assets, your credit score, any other loans, and, of course, the size of your down payment.
Hard money lending
Hard money lending is also a common form among investment property financing options. The best thing about it is that it is a form of fast money. In other words, once you are approved for a loan, it is a matter of days to get the money. Despite this fact, there are a few major factors that make this option one of the worst:
- It is a short-term loan: As a beginner real estate investor, you are looking for a financing strategy that gives you enough time to repay it and still benefit. This one, however, is not the way to go. Once you get the loan, you have up to 36 months to repay it, depending on what you agreed with the lender.
- The procedure: When you apply for a hard money loan, you have to keep in mind that hard money lenders are professional lenders. This means that there will be many paperwork and official procedures involved. So, if you still want to apply for one, be ready to go through the process.
- The interest rate: One of the very important things that a real estate investor should take into consideration is the interest rate. This is important as it is part of your expenses. The reason we do not recommend hard money as a form of investment property financing options is actually the interest rate. Hard money lenders tend to charge a high interest rate if you take into consideration the loan’s length.
The investment property financing options you should go with
To make things clear, every financing option has its own advantages and disadvantages. Therefore, our list of investment property financing options that you should go with is simply one with the least disadvantages.
A mortgage
A mortgage is a form of a bank loan that is special to real estate. This form of investment property financing options is, in fact, one of the most common ones. It is mostly used by real estate investors for financing a rental property. The thing that makes it convenient is the fact that, as we said, it is special to real estate. Moreover, it comes with a decent interest rate as well as longer-term conditions. A mortgage is the best way to finance a business when buying an investment property. You will have the choice when deciding on the loan length up to 30 years. So, you can take your time repaying it.
Related: What You Need to Know About Investment Property Mortgage Lenders
Real estate crowdfunding
Real estate crowdfunding is a creative way of financing an investment property. Essentially, it is when you utilize social platforms such as Facebook to reach out to investors. Now, the word “investors” does not mean that they should be professional real estate investors. It could be any person who is willing to invest some amount of money in a real estate development project. While a person invests a little amount of money, the return could be much greater.
However, for you as a real estate investor, before you get this form of investment property financing options, you should get educated on what it takes to establish a real estate crowdfunding.
Related: What’s All This Real Estate Crowdfunding?
Private money lending
Private money lending is very common and very safe at the same time. Basically, a private money lender is someone with whom you have some kind of relationship. It might be a friend, a family member, or even a co-worker.
The reason behind private money being safe is that it does not require formalities. Also, it does not have strict terms or conditions. The only terms that rule the loan are the ones you negotiate with your lender. The loan length is flexible, and the interest rate is low due to the relationship between you and the lender. However, the only thing to keep in mind is that you should provide some kind of guarantees. The lender might not require them, but you should make sure to stay professional. After all, there is the risk of losing your relationship with that lender if any arguments occur. So, make things clear from the very beginning, and sign a repayment agreement.
For further information on financing a rental property or buying real estate in general, sign up for Mashvisor and check out our blog.