As a beginner investor, understanding how to finance a deal is just as important as finding it. A lack of investment property financing continues to hold back the majority of new investors in today’s market simply because they are not aware of the different financing possibilities. Whether you have access to working capital or not, there are always ways to gain money and generate a positive cash flow.
Investing in real estate is never a bad idea. It offers potential investors with financial and personal benefits such as increased cash flow, home appreciation, and tax benefits. In fact, real estate investing continues to be one of the most popular ways of producing financial wealth. One of the biggest misunderstandings of real estate investing is that you need to have a lot of money to get started, which simply isn’t true. Many of the great real estate investors you see today started off in real estate with little or no money down.
However, the secret that many professionals don’t understand is the fact that there is a number of different investment property financing options available to fund every investment. Because the way in which a specific deal is funded can greatly affect its outcome, understanding the financing aspect is vital.
As an investor, there are different ways to go about financing real estate investments. Each one will have its own set of pros and cons, and your financing approach will depend on the property and the situation. For beginner investors, it’s important to remember that not all investment property financing options are created equal. What works for someone else may not necessarily work for you, but the trick is understanding which investment property financing option will best fit your business investment strategy. Please feel free to share with us any suggestions you may have on investment property financing options that you might be aware of or have tried out before.
Investment property financing options:
In life, having cash means getting what you want. For real estate investors cash is an epic tool for getting many things such as getting more offers accepted and receiving instant equity in their investments. It also has the ability to save investors the purchase amount and save interest. It’s important to remember there will be times when paying cash for a property makes sense and other times when other investment property financing options should be considered. If you have your own money, however, you should always consider using it in the best possible scenarios.
A mortgage is a form of a bank loan that is special to real estate. This form of investment property financing options is one of the most common ones. It is mostly used by real estate investors for investment property financing. The thing that makes it appropriate is the fact that it is special and exclusive to real estate. Moreover, it comes with a decent interest rate as well as longer-term conditions. A mortgage is one of the best ways 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 are in no hurry to repay it.
Hard money lenders
Hard money lenders provide short-term, high-rate loans for real estate investors and they are funded by private businesses and individuals. Hard money financing is generally determined by the value of the investment property itself, with lenders analyzing the “After Repair Value” to determine the size of the loan. Hard money lenders generally won’t fund an entire deal, but rather fund a percentage of the purchase price or the after repair value, which will range from 50 to 70 percent.
Private money lenders
Private money lenders are important to the growth of every new investor. They have the means and intent to invest money into your business, and they are just as interested in working with you, as you are with them. Private money lenders will provide investors with cash to purchase rental properties in exchange for a specific interest rate. These terms will generally be established up front and with a specified payback period. These loans are most common when investors believe they can raise the value of a specific property over a short period of time, typically through renovations.
What are your options for investment property financing with little money?
- Home Equity: An alternative option for investors with no upfront money is home equity. This can be a possible investment property financing option since property values have gone up in recent months, meaning there could be more money available than you think. For investors looking to capitalize on this path, there are generally two options: rewrite the first mortgage and do a cash-out refinance, or keep the first loan in place and add a home equity line of credit.
- Seller Financing: Unlike traditional loans, seller financing works like this: the real estate investor purchases the property from the seller and the two sides sign an agreement that states an interest rate, repayment reschedule and consequences of default that both parties have agreed to. So it’s a type of negotiating between the buyer and the seller rather than between the buyer and the bank.
- Wholesaling: Wholesaling requires neither a high credit score nor large sums of money down. Instead, it simply comes down to having the right numbers in place. Real estate wholesaling consists of finding discounted properties, assigning the contract to a potential buyer and getting paid to do so.
- Partnership: A very common path in real estate investing is partnerships. What one investor lacks, the other can make up for and many partnerships will require one partner finding a distressed property at a discounted price, while the other one uses their credit score and working capital to finance it; just make sure everyone is bringing something to the table. For better investments, aspects such as goals, risk, roles, and return should always be discussed before creating any type of partnership.
When it comes down to it, real estate is a product that must be paid for. As an investor, it’s up to you to determine which investment property financing will work best for each deal. Finally, understanding the importance of real estate financing, including the different financing methods used by real estate investors, will help you in getting started.