I’m the one and only person in my family who purchases and renovates distressed properties, which makes me the go-to gal when it comes to anything real estate related. I’ve fielded a lot of questions over the years, some crazy and some I’ve heard over and over again. But, the one I hear most often is how to secure financing for investment in real estate? The other day, that question got a little more interesting when my sister-in-law, Noelle, brought up the idea of using a personal loan or retirement savings account to buy an investment property.
Those are two options, but there are also others that we spent our lunch hour discussing. While finding the financing for investment real estate has gotten easier over the years, not every choice is going to make sense for Noelle or others starting out in real estate investing. Your circumstances play a big role in whether or not you can access some types of financing, as does your credit profile and the point you are in your life.
Options For Real Estate Investment Financing
When Noelle first approached me about getting financing to invest in real estate she was excited that there were different options to choose from. The more we talked about it, the more confident she felt about taking the leap. But, the financing she ultimately chose wasn’t what she originally thought she would use. Here’s why.
Lots of real estate investors have one goal when searching for financing for investment in real estate: getting approved. It’s the reason some turn to banks for help. They figure they already have a relationship with the bank, so it will be the easiest place to apply. While the local bank may have a friendly staff, it’s not going to matter if they lack the loan product you need to finance a real estate investment.
They’ll probably be happy to talk with you about what they might have, which is most often a 203(K) or a Fannie Mae HomeStyle loan. However, it is difficult to find a traditional lender who knows the ins and outs of these loans. And, you’ll have a lot of oversight, like only being able to do certain types of “approved” renovations or quick turnaround times for the rehab. For a newer investor, navigating these challenges can prove to be too much.
Line of credit
Some investors will apply for a line of credit to buy an investment property. Similar to a bank loan, they come in two flavors: secured and unsecured. A secured line of credit is backed by collateral, such as you’re home. The most common secured line of credit is a home equity line or HELOC. An unsecured line of credit tends to be costlier because you aren’t offering any collateral if things go amiss. The amount you borrow may also be limited because of the risk the lender agrees to accept.
There are some limitations that prevent this from being an option for everyone. If you don’t have a lot of equity in the collateral property, the amount you can tap may not be enough to cover the purchase of another property or the necessary renovations. There’s also the chance that the lender can go after both properties if you default. But, with either type of credit line, you’ll likely be limited to buying, renovating, and selling one house at a time. That’s not going to be enough to build a real estate investing business on.
With a self-directed IRA, account holders can direct some of the money toward alternative investments—including real estate. Some investors are drawn to this because it gives them the ability to grow their money outside of investing in stocks and bonds. In effect, you are borrowing your own money, so you have more control over the terms.
This is a risky way to come up with financing for real estate investment. You’re directing some of the money that’s supposed to support you in retirement toward an investment that could prove wrong if you don’t know what you are doing. If you’re starting out and have decades to amass retirement savings, it may not be a big deal. But, if you’re among the legions of people who start buying and rehabbing properties as a second act, you may not want to potentially waste some of your retirement savings on a bad bet.
Hard Money Loans
A popular financing choice, these are short-term, private loans that are secured by the property you’re buying and rehabbing. While the hard money lender may look at your credit score when determining whether or not to fund your deal, the value of the property you’re purchasing weighs more heavily on their approval decision. Hard money loans for flipping houses are attractive because there’s generally a quick turnaround in getting approval. They’re also more flexible, including the terms, rate, and amount you can borrow.
After weighing all her options, Noelle decided to go with a hard money loan for a big reason: speedy approval to get the cash in hand. She didn’t want to wait weeks for approval from a bank nor did she want to put her own home up as collateral with a line of credit. Drawing from a self-directed IRA didn’t make sense since retirement is in the rearview mirror for Noelle. Hard money loans are often the best option for financing a real estate investment—and, it’s the one I use exclusively.
Choice Matters When Finding Financing for Real Estate Investment
When you find a good deal or a distressed homeowner who needs out from under an “ugly” situation, time is of the essence. Believe me, there are other investors out there who will jump on your deal if you don’t put that money down fast. And, homeowners who need to sell fast are not going to wait around while you try to drum up some funds. They will sell to your competitors first. That’s why hard money is critical—you don’t have to wait.
As an independently owned and operated HomeVestors® franchisee, I have access to UGVilleSM, which includes a lending portal that makes finding a hard money loan as easy as a few clicks of a mouse or taps on an iPad. I simply put in the numbers of a deal and the lenders send funding offers back to me. In effect, they compete for my business, which means I don’t have to sell myself or spend time filling out applications only to get denied. How’s that for the choice Noelle desired when finding financing for her real estate investment?
To find out how you can launch your professional real estate investment career with the necessary financing call HomeVestors today.
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