The best real estate investments can only maximize on their potential of making a substantial amount of money if there is proper financing.
Even though not all real estate investors have lots of money sitting around to be invested in property, there are numerous investment property financing options available. The method of investment property financing used will greatly influence its outcome depending on the property, the business strategy used, and the particular situation of the investor. Understanding how to find the right investment property financing with low interest rates is imperative for a real estate investor to maximize on profits and be successful. Let’s look at some of the best options real estate investors have for investment property financing.
Hard Money Lenders
Borrowing from hard money lenders is an investment property financing tactic whereby the funds for the real estate investments are given by a private business or individual, rather than by a bank. It is usually based on the value of the investment property. Hard money loans don’t need to go through corporate procedures, hence they often have looser requirements for qualification and can be secured much quicker. This enables you to close quickly when you have an awesome deal on your hands.
Real estate investors usually use this option on a short-term basis as bridge loans to strike the deal before they are able to secure long-term traditional financing. This can be a very good way to offer finance for a flip. Moreover, hard money lenders may be more open to supporting risky projects.
However, hard money loans usually have very high interest rates as well as shorter terms and often need personal collateral or a substantial down payment. They have a much lower loan-to-value ratio as compared to other forms of financing and ought to be used with caution, with a clearly defined exit strategy.
Private Money Lenders
Private money lenders are quite similar to hard money lenders in many aspects, except that private money loans come from people whom the investor knows personally, and not from professional lenders. In this case, there is usually an informal agreement, and the lenders can be individuals who appreciate your vision and have the means as well as the interest to invest capital in your business, like friends and family.
They provide investors with finances to buy an investment property in exchange for a particular interest rate. They are often less business oriented, and, therefore, the term length and rates can be easily negotiated to serve the best interests of both the lender and the investor. This will be determined by the relationship between the two parties. Private money loans enable real estate investors to get the cash they need much faster, and with lower rates than if they went through a bank.
For those lucky enough to have substantial capital to pay all cash, this is the simplest and quickest form of investment property financing since it has very few complications. Cash financing enables investors to expedite the purchase and get more offers accepted. Cash buyers can also negotiate lower property prices. They save on interest, receive instant equity, and increase their cash flow. When using cash financing, an investor usually makes payment to the title company, and the title company will then pay the seller.
Financing investment property using a conventional mortgage will require a down payment of 20% of the property’s purchase price or more. However, this method of investment property financing has more restrictions than home loans. Moreover, most mortgage lenders have a limit to the number of properties and the total amount of money they can finance for a single investor. A conventional mortgage is therefore often an investment property financing option for small investors with few properties. The financial institution or bank will assess your financial health to decide whether you can afford the property you want to buy. Conventional mortgages generally provide lower interest rates compared to hard money loans.
Related: What are options for investment property mortgage loans?
Tapping Home Equity
Real estate investors can tap into their home’s equity to provide investment property financing for a flip or long-term rental through lines of credit or home equity loans. In most cases, investors can borrow up to 80% of the value of their home’s equity to use for purchasing a second property. However, you ought to ensure that you can pay back the home equity loan to avoid losing your home. Since ahome equity loan is secured by your primary home, the interest rate is normally very low compared to private money or hard money.
Related: What Is Equity in Real Estate?
This method of investment property financing is an arrangement where the owner of the investment property acts as the bank and accepts to finance your purchase. You will, therefore, pay monthly payments to the seller instead of to a bank. This usually happens only when the seller owns the property free and clear. This makes seller financing hard to come by since very few properties are owned free and clear. The majority of the owners usually have some existing mortgage. This option may be desirable when the seller doesn’t want the property any longer, but they would want to collect steady monthly payments on it.
If you are unable to cater for investment property financing alone, you can partner with another person to finance the property. Real estate partners will usually divide the profits according to their individual contribution. Partnerships will help you get your investment property sooner and can be structured to suit the needs of the partners. If you have the idea of buying an investment property but are short on finances, bringing in a partner who can offer the funding while you control the management can be a lucrative option. You and your partner will write up a contract establishing your responsibilities and how the profits will be split.
Real estate partnerships can be an excellent way to start your property investment career. A partner can be used to finance the entire investment property or simply provide funds for the down payment. They may have a passive or active role in the investment property as agreed and signed by both parties in the operating agreement.
Related: What You Need to Know about Real Estate Partnerships
In some cases, investment property financing can be done through the lease option. You can invest in a property in a lease agreement for little to no money down by slowly making payments until when you get the money to buy it, typically in two or three years. A portion of the monthly payments is put towards the purchase price of the property. Renting the property gives you ample time to find financing or save up for down payment.
Investment property financing can be an intimidating task for any real estate investor. As you can see, there are numerous ways available to finance an investment property. The most successful real estate investors know how to determine which investment property financing will be most suitable for each deal since all deals are different. To pick the best one for your investment, you will have to do extensive research.
Be sure to make use of Mashvisor in planning your property investment as it will provide you with numerous analytical and searching tools that will help you in your real estate investment journey.