I’ve been investing in real estate for decades. I’ve met a lot of investors who scrimped and saved to purchase their first house to flip, only to end up not having the resources to continue flipping. Why? Well, many of them didn’t realize that real estate investment financing is a necessity and not just a fallback.
In this business, you need liquid cash to close good deals when they arise. But even for those of us who have been successful, having hundreds of thousands of dollars on hand isn’t always possible. This is especially true when working on multiple deals.
It’s important to understand all of your real estate investment financing options. If you are just starting out—or if you want to grow your real estate investing business—having lending sources is crucial.
Not all real estate investment financing options are the same. Some may be the best available options while others may not be so beneficial in the long-run. Here’s a guide to some of the top options to receive the real estate investment financing you need.
Real Estate Investment Financing Options Explained
Keep in mind, when exploring these options, you don’t have to choose just one. Depending on your financial situation at any given time, one option may work better than the one you previously used. You don’t have to stick with one method of obtaining financing throughout your entire career.
Home Equity Line of Credit (HELOC)
A HELOC is a combination of a line of credit for an investment property and a home equity loan. You can borrow a sum of money against your equity, but you don’t just get a lump sum. Instead, you receive a line of credit that can total the approved amount over a period of time to be used however you want. And, most HELOCs (though, not all) have adjustable interest rates.
The flexibility of a HELOC can be a plus but there are drawbacks. For one, you are putting up an existing property, maybe even your actual home, as collateral. This is a business with few guarantees, so that can be nerve-wracking. The other is that the payments can put a hitch in your savings or spending plans.
Crowdfunding is fairly new to real estate investing. Essentially, you gather a group of private investors, each of whom pays into a pool that you use to finance your project. They then all get a proportionate share of your profit. Be sure and check this out with your legal or financial advisor before moving forward with this option.
There are a lot of ways to obtain crowdfunding—the easiest and quickest can be through an online platform. You will likely be competing for the eyeballs of tens of thousands of small investors who just want to have some fun, for the most part, and make a little cash. It can be hard to stand out and hard to get noticed. And even when you do get funding, everyone gets some of your profit.
You can also try to attract your own private investments, which works essentially the same way but unless you are a known brand, it can be pretty challenging.
Borrowing money from family, friends, and other associates also counts as private lending. But, it may not be the best decision to mix family and business. If you can make it work, then good for you, but it’s not for everyone.
Hard Money Loans
Hard money lenders are pretty much the opposite of traditional banks. They understand the real estate investment business. They know that you might be a little cash-poor or credit-thin. That’s all baked into their business model.
Of course, they don’t just say “Here’s a bag of cash, pay us back when you can!” Every hard money loan comes with its own set of rules regarding the rate, duration, and how much you can actually take out at once.
It varies for everyone, but these are some of the things they’ll be looking for.
- How much cash can you put down? Some hard money loans require you to contribute a down payment while others fund your entire deal.
- How’s your credit history? Some lenders don’t require credit, but of course, the rates tend to be higher.
- What’s your job history? Have you been successful? Have you been in the business for a while?
- What does the deal look like? Some lenders really take into account the details and evaluate the deal’s potential.
There are a lot of hard money lenders out there. The real challenge is finding the one from which you can get the best rate and the most favorable terms.
A self-directed IRA is a fairly common tool that people often use to conduct a variety of investments. When you have a self-directed IRA, you can take out money to use for a few specific investments, including precious metals, extractive goods, and real estate.
When considering leveraging a self-directed IRA for a real estate investment, it’s important to understand the way it may impact your taxes; there can be tax benefits as well as complications. Another thing to consider is that you are taking money out of your retirement plan; it could be a gamble. But, it’s up to you to determine if it’s a risk you’re willing to take.
Gap loans are rarely voluntary. They happen because the investor isn’t able to pay off the first loan. Reasons could be that the repair costs were too high, the market went sideways, or it took too long to sell. These can be a last resort for real estate investment financing.
However, there are some real estate investors who leverage gap funding to keep money flowing so they can hop from deal to deal. It may work but the rates keep going up and the terms likely get tighter.
There are real estate investment financing options that extend beyond this list but I’ve found that hard money loans work best for my business. In my opinion, it’s the most consistently fruitful approach, both in terms of how much I can get and the terms that come with it.
But as I said, there are a lot of lenders out there. And there are a lot of different terms. So how do you find the one that works best for your business?
The Best Way To Use Hard Money for Your Real Estate Investment Financing
I used to scramble around filling out the same form over and over again just to get enough hard money rates to compare. It was not easy but it was necessary. That changed when I became an independently owned and operated HomeVestors® franchise.
As a franchisee, I have access to a proprietary hard money lender portal. All I do is enter the details of my deal into the portal (one time!) and they are sent to a select nationwide network of trusted and fair hard money lenders. I get near-immediate results, I’m able to easily compare to choose the best option.
I can’t tell you how much this has changed things. It saves time and, of course, saves me money by letting me get the fairest and best rates for my business. This is hugely important if you are just starting out, since some lenders are geared more toward people at the beginning of their career. But no matter where you are in your real estate investing career, you should receive the best terms for your deal. If you want the best way to get real estate investment financing, request information about becoming a franchisee today.
Each franchise office is independently owned and operated.