Investing in real estate might be one of the most lucrative businesses in the world.
However, the number one concern for real estate investors is money. This should not be your major problem if you are interested in becoming a real estate investor. We are here to tell you about all the different investment property financing methods and help you select the best one for you. Just continue reading.
Financing an investment property is not as hard as people think. You do not even have to have the money to do buy an investment property. There are always plenty of financing methods that you can go with based on your financial abilities. So, let us discuss how you can go about investment property financing.
Investment property financing: Cash
Studies show that 24% of American real estate investors choose to finance a real estate property with their own money. You can also do that if you have the cash to invest. However, it is not advised to do so as it will minimize the return on your investment property. The more leverage, the better return on investment you get on your property.
Investment property financing: Conventional loan
A conventional loan, also known as a conventional mortgage, is one of the traditional financing strategies. Most residential real estate investors choose this financing strategy as it is easier and comes with longer terms. Also, if you are considering rental properties, then your tenants are going to take care of the mortgage payments. Moreover, you can benefit from tax deductions as well as lower interest rates.
To learn more about investment property financing cash vs. mortgage, read our blog “Is Mortgage the Best Way to Finance Rental Property?“
Investment property financing: Hard money lenders
Hard money lenders are individuals or companies that lend money to invest in real estate. The most important aspects of hard money lenders are: 1) They have short-term loan terms; 2) They do not require credit score verifications; 3) They require higher interest rates; 4) They provide the money within days, which makes it the best characteristic of hard money lenders.
Although it could be a good option to go with hard money, you should be careful. As we said before, they tend to have shorter loan durations, up to 36 months only. So, make sure you perform proper math calculations before getting into it. Otherwise, you will find yourself in a financial bind. For example: Using the hard money to finance a fix and flip makes financial sense. But it is not advised to use it for residential real estate investments as it will be impossible for you to pay off the loan in just three years.
Investment property financing: Private money lenders
Private money comes with fewer formalities than the hard money. It is basically borrowing money from your family members, friends, colleagues, etc. The main difference though between private money and hard money is that private lenders are not professional lenders, while hard money lenders are professionals who are lending specifically to invest in real estate. Another major difference is the lending term. A hard money lender will give you the money to return in up to 3 years. On the other hand, a private lender has no problem giving you the money for a longer period. So, if you are a beginner real estate investor, this might be a better financing strategy.
Investment property financing: Owner financing
If you can’t qualify for a mortgage or can’t go with other financing strategies, then this is for you. Owner financing is basically when you agree with the seller that you will pay him/her monthly instead of paying all in cash. It is like taking a loan from the seller him/herself. However, you should know that the seller might set a higher price as an interest. So, basically, it is the same as the mortgage concept, but instead you are dealing directly with the property owner.
Investment property financing: Portfolio lenders
Portfolio lenders are simply banks which lend you their own money. As you already know, when applying for a conventional loan, a bank will not pay you its own money. This makes the terms and qualifications harder on the borrower. However, in the case of portfolio lenders, banks give you their own money with less strict terms.
Since banks do not advertise that, the only way to find this option is by networking. You can ask other real estate investors or real estate agents around you. Or you could go through a phone book and call all the banks on the list to check if they are a portfolio lender.
Investment property financing: Equity loans
Home equity loans are another great option for investment property financing. When you take a mortgage with a 20% down payment, it means that you have an equity of 20%. Therefore, what you can do is buy another investment property based on your equity in the previous one. The best thing about home equity is: 1) A bank will not look at your target property as it only looks at your primary one; and 2) It comes with lower interest rates than other financing strategies, as well as tax deductions.
Investment property financing: Real estate partnerships
Real estate partnerships is another way to finance an investment property. Even though you will not be borrowing money, you will put the efforts in return for the money. So, make sure you have the proper real estate education needed for real estate investing. You must know all about owning and managing investment properties. You should also have a solid business plan that has all your strategies as well as exit plans.
Finding a business partner is not so hard. All you have to do is look around. You can check your family, friends, colleagues, other real estate investors, etc. Also, you can go online and join investors’ forums. You will get to meet many people who are willing to connect with you and start investing in real estate through a partnership.
Even though a real estate partnership is a great way to finance a business, you should still be careful. Partnerships are not always roses, unless, formed in the right way. Make sure you agree on every single detail and have everything written. Otherwise, both you and your real estate partners might be at a loss at the end.