So, you’re looking to fund your next real estate investment. Maybe it’s your first one and you’re not really sure where to start. Maybe you’ve already done a few home flips or acquired a few rental properties, and feel like you’ve tapped out your options. But remember—where there is a will, there is a way… Time to learn more about real estate financing.
10 Real Estate Finance Tips
- Mortgage Lending
- Small Business Lending
- CARES Act Funding
- Private Lenders
- Crowdfunding
- Peer-to-Peer Lending
- Hard Money Loans
- Liquid Assets
- Home Equity
- Seller Financing
You need money in order to make money, and that’s especially true when it comes to real estate. However, the money you use doesn’t have to be your own. In fact, most real estate investors using cash to buy property are leveraging other peoples’ money. Leverage (that is, financed debt) can give you more spending power than you would normally have if you were using your own resources. It can also help you get multiple projects going at once.
But how exactly do you go about searching for financing solutions? There is not one answer that fits the needs of every investor. And even the same investor will probably need to use different financing solutions at different times. When you first start out, it can be possible to finance a few properties with a traditional mortgage, but once you start building a portfolio, you will probably need to move away from consumer options and explore other strategies.
Here are 10 funding resources to explore for your next real estate investment opportunity:
1. Mortgage Lending to finance your Real Estate
Mortgage loans are the traditional way to finance a property for most retail investors. Homebuyers will need to go through a vetting process that includes a credit check and an extensive assessment by the underwriting team for the bank or lender. For this reason, a mortgage loan can take weeks or months to process.
While it usually works out for a homeowner’s own residence, mortgage lending can be a bit cumbersome if you need to act quickly on a property. Moreover, in the post-housing-bubble real estate market, institutional lenders are going to be reluctant to extend mortgages if you already have financed multiple properties, as it presents a significant credit risk.
If you are looking for financing solutions for a larger piece of commercial real estate (such as an apartment building, even a smaller one), the local branch of a commercial bank may not be the best place to shop for a loan. However, they may be able to refer you to a different side of the business that can extend larger loans to investors, and perform a financial analysis on your real estate assets as a business rather than examining your own personal creditworthiness.
2. Small Business Lending
Small business lending might be another avenue to pursue…sort of. If your real estate business is legally structured as a business—as in, there are other parts to it, such as renovating, asset management, marketing, and office support—this will make obtaining a small business loan easier.
Small business loans are not for passive income opportunities. Contrary to popular belief, you can use a certain type of small business loan to improve real estate for business purposes, such as the SBA 504 Loan offered by the Small Business Association. However, the SBA 504 Loan is technically for sizable commercial real estate—and you must have a tangible net worth of over $15 million and $5 million in income.
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3. CARES Act Funding
The CARES Act provided lots of funding to individuals and businesses around the United States in the aftermath of the Covid-19 Pandemic, such as EIDL loans (Economic Injury Disaster Loans). However, many of these government issued loan products, such as PPP (the Paycheck Protection Program), cannot be used to invest in real estate.
There is a simple workaround to this: if you can use EIDL or PPP loan products to keep your payroll afloat (including yourself), you may be able to free up your cash reserves for real estate development. Alternatively, there are CARE loan products that are permissible for a real estate business to use, especially if those loans are geared toward mortgage relief. Another workaround is to use a PPP loan to finance the operational end of your investments, leaving your cash reserves freed up for real estate investment.
4. Private Lenders
Private money or OPM (other people’s money, as it’s often called) is another popular investment financing avenue. Keep in mind that private money is typically going to have a higher interest rate than a bank financed loan. But the upsides are that private money will be easier and faster to get.
In most cases, a private lender is less concerned with your work history and credit score than they are with the value of the property as collateral because they will have an easier time selling the property or putting it into their own portfolio should you default on the loan. If a potential borrower is looking into real estate lending solutions through a private lender, they should have a real estate lawyer examine the details of this real estate financing option.
While a mortgage banker at a financial institution will be bound by regulatory oversight, there is very little governance when it comes to private lending. Protect yourself and your real estate assets by having an expert in real estate law review the contract to ensure it will facilitate an equitable real estate transaction.
5. Crowdfunding
Crowdfunding is another path to explore for funding real estate investments. If you are going to crowdfund through your own network, you will need to have a lawyer set up some sort of LLP (Limited Liability Partnership) so that your investors will be limited partners (that is, while they invest their money in the venture, they cannot control how you use it, exactly).
If you acquire too many investors, then your venture starts straying into the realm of a REIT (real estate investment trust), which is another crowdfunding avenue you could pursue provided the projects are large enough.
6. Peer-to-Peer Lending
The advent of smartphones and apps have facilitated a new peer-to-peer (P2P) economy when it comes to selling old clothes, hitching a ride, and having your groceries delivered. But it has also facilitated changes in the real estate industry as well.
Instead of going to a bank or mortgage broker, you can connect with other, everyday people who have extra money to loan out. There will still be a vetting process to participate in these venues, and you will need to present a convincing case to prospective clients.
7. Hard Money Loans
A hard money loan is specifically geared toward short term goals, like a fix and flip, or for use as a bridge loan (also called a swing loan or gap loan) to close the gap in other financing or transition out of one loan into another.
Hard money lenders charge the highest interest rates, but their lending requirements are generally pretty lax (their risk is abated by the interest they charge). Keep in mind that hard money loans are usually only extended for a short period of time and settled with a balloon payment. That means there may be a payment schedule along an amortized calendar for a few months, but then the rest of the payment will later become due in one lump sum.
8. Liquid Assets
If none of these loan options appeal to you, you might consider using assets you already have. If you have a retirement account, there are ways to take money out without paying a penalty.
For instance, even a tax deferred account, like a RothIRA, is available to first time homebuyers to put a down payment on a property. However, you cannot empty the entire account; it’s capped at $10k. You should also take note of the fact that you can hold property in your IRA without liquidating the assets and paying taxes, just like you can with gold and cryptocurrency.
Other liquid assets to explore include savings accounts and brokerage accounts. However, you should explore these options fully, along with their implications for the future, with a professional tax advisor. Schedule a free consultation with an Anderson Advisor’s CPA today!
9. Home Equity
Another way to tap into some real estate funding is by using your own home equity. Equity is how much you own your home outright. If your loan is fully paid off, then you have 100 percent equity in your home. If your mortgage is only half paid off and you still have a monthly mortgage payment, then you have 50 percent equity.
A HELOC (home equity line of credit) can be issued by a lender who uses your equity as collateral. If your equity is large enough, you can get a sizable loan to put down on a property (or even buy it outright).
10. Seller Financing
Seller financing is where the owner of the property you are looking to acquire allows you to take ownership of it without paying in full upfront. Instead, the seller will act like the mortgage holder, and you will pay them on whatever periodic basis you establish until the mortgage is settled. This type of arrangement is also commonly known as rent to own. Seller real estate financing can be a very effective way of building your portfolio.
For example, let’s say someone owns a home for $200k. If you cannot get a mortgage, and they are willing to do a seller financing deal, then you can pay a down payment you both agree on, and pay the remaining balance, plus interest, on a monthly interest.
If you’re wondering why a seller would do this, you’d be surprised to find that it’s not an uncommon arrangement. It provides the seller cash flow and helps an aspiring investor get started with real estate investing. Remember, a big part of real estate investing is the art of the deal and how you work it out with the seller.
No Money? No Problem! Get Started in Real Estate Investing Today!
Remember that investing in real estate is all about getting creative. And when it comes to financing your next deal, there are many options beyond the traditional mortgage loan.
Your best bet is to start networking with real estate professionals who can point you in the right direction, and perhaps connect you with sources of funding, such as some of the ones mentioned above.
Remember: the best real estate investors do not do it alone; they rely on their network for help…and money. Don’t have an established network yet? No worries, you can join the Anderson Funding Community today!
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