Finding an investment property is the first step on your journey towards building wealth through real estate. The next step is to find the right financing solution for you. For real estate investors who are getting into the market, a traditional mortgage loan isn’t the only option; there are a variety of other financing alternatives to consider. These alternatives make it possible for real estate investors who don’t have enough capital upfront, don’t qualify for traditional loans, or simply need a better suited financing alternative to get the funds for their investment needs.
10 Alternative Ways to Finance Investment Property
Let’s take a look at 10 alternative financing options for real estate investors who are ready to make a property purchase:
1. Short-Term Hard Money Loans
Hard money loans are provided by private investors or companies that aren’t part of a traditional financial institution, such as a bank. These are asset-based loans where the property itself is used as collateral for the loan. Hard money loans are typically short-term loans which range from 6 to 24 months. These are ideal for fix and flip investors who are able to pay the interest for the loan initially and then the balloon payment once the house has sold.
The borrower’s creditworthiness is of less concern to hard money lenders than the property itself, which is what the loan is based on. Hard money loans are the perfect solution for those who don’t qualify for a traditional mortgage, those who need a faster loan option, or those who have found a good deal on a property to flip and need a loan based more on the deal itself rather than their personal financial standing.
Hard money loans can be issued quickly and give real estate investors the opportunity to beat the competition. Meanwhile though, they come with higher interest rates, usually anywhere between 6% and 8%, depending on the lender. Due to the riskier nature of the loans, the higher interest rate is necessary for lenders to mitigate this risk.
2. Long-Term Hard Money Loans
While hard money loans are typically short-term, there are also long-term options for those who are purchasing rental properties. 30-year rental property loans are available for stabilized investment properties that investors are buying to rent out. These typically have a fixed rate and can have lower interest rates than their short-term counterparts.
These loans are still provided by hard money lenders who are private investors or companies, and therefore the loan application process is easier and more property-focused than traditional loans. They are a great solution for real estate investors who either don’t qualify for traditional loans or are looking for an alternative option to a regular mortgage.
3. Private Money Loans
Private money loans are typically short-term loans that real estate investors can use to purchase or refinance a property. These are provided by private money lenders who are not associated with any financial institutions, which means there are less rules and regulations around these loans and loan terms can be more flexible and better suited to each investor’s needs.
These loans are asset-based. and the property is used as collateral. Private money loans are often based on the value of the property purchase itself, and financing can be done more quickly. These loans can be used for fix and flip properties, rental properties, cash-out refinance, bridge loans, rental loans, and construction loans. For new real estate investors who don’t have a solid track record yet, these can be a successful financial solution.
4. Seller Financing
While this option may not be a common one, for some real estate investors it can be a game-changer. Seller financing allows investors to use someone else’s money to purchase a home, without having to use their own capital. Seller financing is when a property seller provides the financing for a buyer to purchase a property. The seller will hold onto a note of purchase, and the buyer will pay a monthly installment to the seller to pay off the loan.
This is usually a short-term solution for investors who are likely to have the funds available within a few years. One of the biggest benefits to this financing option is that the terms of the loan are negotiable, and a deal can be made to suit both the buyer and the seller. However, a seller will need to have fully paid off their mortgage to be able to offer this alternative to a buyer.
5. Tapping into Your Home Equity
Purchasing an investment property when you have already built equity in a house can be easier because you can tap into this equity using a home equity loan or home equity line of credit (HELOC). A home equity loan will often allow investors to borrow up to 80% of the home’s equity value. This can be used for the purchase of an investment property, as well as the repairs and renovations.
A home equity loan comprises of a lump sum that can be borrowed with a fixed rate and predefined repayment period, whereas a HELOC is a revolving line of credit from your home equity which you can use as and when you need it. HELOCs are divided into a draw period, where you can take out the money you need, and a repayment period which usually follows after the draw period, where you’ll begin paying back the loan.
The upside to this is that you’re tapping into equity you have already built up in an asset that you already own. However, the downside is that your original property will serve as collateral, so if you cannot pay back the loan, the lender can repossess your property.
6. BRRRR Loans
The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat. This method involves purchasing distressed properties, specifically in order to rehab and rent out. These properties are then refinanced so that the investor can continue their journey with another property. The loan programs associated with BRRRR typically provide the funds for investors to purchase a property and then renovate it.
Traditional lenders may not be very understanding when it comes to this strategy. and creative financing alternatives are often the best option, which is where BRRRR loans come in. Companies that provide BRRRR loans often give investors the option to do short- or long-term loans. These will also come with multiple exit opportunities, or investors can continue for the long haul. These loans are a good solution for investors who are interested in a stable monthly payment, as opposed to a balloon payment.
7. Listing Your Property on a Crowdfunding Platform
Crowdfunding is a buzz word in the world of finance, and real estate investors can also tap into this resource for funding. Large groups of people pool their funds online to provide financing for those who require it, such as real estate investors, who can post their investment property, investment plan, and proposal online and request funding from the public on a crowdfunding website. Some of the most popular crowdfunding platforms for real estate investors are CrowdStreet, Fundrise, and DiversyFund.
The advantage of this is that funding can be obtained without all the red tape of a traditional loan, and the loan terms are likely to be more flexible. Crowdfunding also means that investors are getting funding based on the quality of the deal, and not their own personal financial history or credit score.
8. Joining a Real Estate Investment Club
Another way to get financing for an investment property is to join a real estate investment club. These groups can be extremely helpful, particularly for new investors who are trying to navigate their way around their first real estate deal. The idea here is that investors who join the club bring a certain amount of funds with them, these funds are then pooled, and the members make investment decisions together.
This method allows investors who may not have been able to purchase a property the opportunity to get their foot in the real estate door and begin their investing journey along with the help of others who are interested in the same thing. The advantage to this is that members can learn from each other and grow their investing experience to make even better decisions over time.
9. Cash Financing
Cash is king in a bustling housing market, so some investors may choose to get a cash loan. This means that they will partner with a company that can buy a home cash and then establish a loan repayment structure with the company to buy it from them once the deal is concluded. The benefit to this is that investors are more likely to beat the competition and secure a good real estate deal.
First, you’ll apply for a loan with a cash financing lender, then the loan is underwritten, and pre-approval is given. From there you’ll work out your budget and determine your best cash offer that you can pay off in the given time frame. You’ll then purchase the property and begin paying back the loan. This is useful for investors who need to outbid competitors in a bustling market and don’t have the cash on hand, or those who are selling another property and can pay back the loan quickly.
10. Traditional Loans
Traditional loans encompass any conventional bank loans that comply with the rules and regulations outlined by Fannie Mae or Freddie Mac. They are based on your personal credit history. and so your credit score is of utmost importance. They typically require a down payment of around 20% of the property’s purchase price for an investment property.
Any rental income that investors will earn is not factored into the loan requirements, which are centered around the borrower’s ability to pay off the loan. So, income and assets are the two pillars which the loan application criteria revolve around.
Each investor’s situation is different, so it’s important to weigh up the pros and cons of each financing method before choosing the one that is best suited to you. Luckily, there are a variety of alternatives for many different investing strategies, and you’re likely to find one that will fit the bill quite easily.
This guest post has been contributed by our friends at New Silver.