Ultimate Guide to Real Estate Investment Lending Options

We all know the saying “it takes money to make money.” But one thing I used to wonder when I was starting out as a real estate investor was how do I get that money in the first place? Thankfully, over the past two decades I’ve learned a thing or two about how to get money to invest in real estate.

Whether you are starting out or advanced in your career, you should be looking at different real estate investment lending options to finance your next deal. Let’s be honest, it’s not likely that you’ll always have the cash on hand to buy an investment property.

Veterans understand the ins and outs of investment lending, but if you are fairly new to the business, there might be a lot more to learn. There are a ton of options and they all have their pros and cons. It’s up to you to find the real estate investment lending option that works best for you. Here’s your guide to doing so.

Note: Every situation is different and there is no ONE right way. Loans are a big deal. Make sure you consult with a finance professional before making a move.

The Importance of Finding the Right Investment Lending Type

There are a few things about real estate investing you should be aware of. One thing to consider is that you’ll probably spend a lot of time looking for the right lead. Once you find it, you want to be able to act fast.

Another thing is that the more successful you are—and the more properties you have at one time—the more tied up your cash flow might be. Unless you are extremely wealthy, you’re probably not going to be liquid enough to just throw money at a house. That’s perfectly normal.

And that’s where lending comes in. Lending is a way to finance deals so you can keep growing your portfolio without getting rid of all your cash on hand.

Of course, needless to say, a loan is a bet on yourself and your deal. You’ll have to pay back more than you’ve borrowed, but you have a set amount of time before it’s due. That means your deal has to pay for itself and the interest before any penalties are applied.

Consider the following factors before embarking on any type of real estate investment lending option.

1.   How quickly can you get the money? Remember, you have to act fast. If you are cutting through red tape and waiting for the sign off from seven middle managers, the opportunity can slip through your fingers.
2.  How much can you borrow? It’s not just about raw amount. Will it cover the cost of the property and all repairs? All of this matters.
3.  What are the interest rates? With most types of loans, the interest rate is based on cash on hand, your existing credit (with some notable exceptions), possibly your work success, and more. Obviously, the lower the rates the better.
4   What are the terms and conditions? What are you putting up against the loan? How long until you have to pay it back? Are you paying the interest throughout the borrowing period, or is it all deferred?
5.   What happens if something goes wrong? Will you be paying fines, or will you lose your property? Will you be digging yourself into a hole?
6.   How comfortable will you feel throughout the life of the loan? Loans can be intimidating. If you are going to feel terrified of the bill coming due, it might not be worth it. Your mental well-being should be a consideration.

Again, there is no one right answer to any of these questions. There’s only what works best for you.
So let’s dive into a few types of real estate investment lending options.

Types of Real Estate Investment Lending Options

There are a lot of ways to get the money you need to finance your next investment. Here are some of the major ones.

House IconHome Equity Line of Credit (HELOC)

A HELOC combines a few different ways people finance their property purchases— a straight line of credit for investment property and a home equity loan—into one vehicle. The way it works is fairly simple. You borrow a sum of money against your equity, but you don’t just get a lump sum. You get a line of credit that can total that amount over a period of time to be used however you want. And, most HELOCs (though, not all) have adjustable interest rates.

For example, if you take out a $200,000 HELOC with a 10-year term, you can spend that in whatever amounts you need at any given time while only paying the interest. This is known as the draw period. Afterward, you are paying back the loan.

This is a popular vehicle, but it doesn’t hurt to weigh the pros and cons.

Pros:

  • It’s flexible. You can spend the money on everything from a new property to repairs to parts and labor and even your day-to-day costs like groceries.
  • You aren’t paying interest on what you aren’t spending. If you take $50,000 out, that’s all you have to pay interest on.
  • It’s fast. Approval on a HELOC might not be super fast, but once you have it, you can draw from it whenever you want. It’s a ready source of cash without a lot of paperwork.

Cons:

  • Payments balloon after the draw period. They can double or more overnight. That can be quite a sticker shock.
  • Adjustable interest rates can make the bill even higher. Right now, interest rates are at a historic low. So if they go up right after the draw period, you’re going to be paying even more.
  • The bank owns part of your house. You’ve taken a line of credit against an existing property or even your own home. That’s a risk.
  • It’s tempting. I’ll be honest, it’s nice to have a huge line of credit. Unfortunately, that makes it really easy to spend. You might be drawing more money than you had expected, and then paying more interest, and having a bigger bill when the draw period ends.

HELOCs are convenient, but they can alter your finances really quickly, leading to unpredictable expenditures down the road. And if there’s one thing I hate, it’s less predictability in my spend

Hands shaking IconPrivate Lender

This is a category that always surprises people. It turns out that there are a lot of private lenders who want to invest in real estate without having to do the actual work of it. They are entrepreneurs, investment sharks, gadflies, and everything in between. These are people who are willing to finance your job—for a cost, of course.

How do you find them? There are website forums for them. Networking always helps. You can also spread the word about yourself (such as with a social media presence like a real estate investor YouTube channel)and have them come to you. Once you make a connection, all you have to do is sell yourself and your product.

Pros:

  • You’re selling yourself. These are people more interested in your work than your credit history.
  • Not a lot of red tape. They just want to know if you can do it. It can go very quickly, especially if you have an established relationship.
  • No monthly payments, usually. This gives you a little more flexibility.

Cons:

  • High interest rates. Speed comes at a price, and these lenders often charge a much higher interest rate for the pleasure of doing work for their money.
  • Collateral. Most of the time, they own part of the property, and can recoup that if you can’t pay.
  • Your primary lender may not like it.
  • You have to do all of the paperwork on your own.

Note: In this section, we’re discussing professional lenders. Of course, you can borrow money from friends and family, or extended networks (though in a different way than crowdfunding, below). This can be as straightforward as someone writing a check or as complex as setting up an investment group with payment schedules. Personally, I prefer not to have business affect my personal relationships. I don’t want relationships ruined because the market went south unexpectedly. But, your level of comfort may vary.

Private lenders are appealing. But remember, there’s no such thing as easy money. Be careful about any personal arrangements into which you enter.

Right ArrowLeft ArrowGap Funding

Gap funding is when you take out a second loan to cover your first. The reason people usually take these out is because they are unable to pay off their initial loan. The market went bad, the house is taking longer to rehab, you can’t find stable renters, etc. That’s a tough spot, and one that a lot of us have been in, and there’s no real good answer. A gap loan might be needed.

But there are some people who recommend this as a way of keeping money flowing. These are usually self-described gurus who have a secret to sell you. And that secret is: keep taking out loans and hope that you can keep the wheels moving. That may not be the best advice.

Pros:

  • If you can get the money when you need it, it helps temporarily get you out of a tight spot. That’s no small thing, either. It’s just not a long-term solution.
  • In theory, you can keep buying houses.

Cons:

  • It’s risky for you. You could end up owing a lot of money to a lot of lenders.
  • It’s risky for the lender, and that means outrageous terms, which means more money to pay back, which means you might need to take out an even riskier loan, and so on.
  • It can be stressful.
  • It’s not a sustainable policy.

If you have to take out a gap loan, that’s tough. I sincerely hope things turn around. If you want to take out a gap loan thinking it’s a way to beat the system then you’ve likely been listening to the wrong gurus.

Nest Egg IconLeveraging a Self-Directed IRA

A self-directed IRA is a pretty complex process that’s easy to explain: instead of your 401(k) sitting around earning steady rates, you can invest it in different things and potentially earn even higher rates. You can direct it to precious metals, foreign currency, and you can use your self-directed IRA to invest in real estate. 

Before tapping into your IRA, you should consult with a tax and financial expert. It isn’t as simple as “cashing out your 401(k).”.

Pros:

  • You can get a quick lump of cash to invest in real estate.
  • There are potential tax benefits.
  • You can potentially earn more than you could keeping the money in your retirement account.
  • You have flexibility with your money, and you’re your own boss.

Cons:

  • The IRS pays very close attention to all of this, and there are also potential tax implications and complications (for instance, you can no longer write off depreciation).
  • You’re going to create a lot of taxable events unless all your paperwork is perfectly lined up.
  • You can no longer offer a personal guarantee through your IRA, because, well, it’s gone.
  • There might not be as much money in your account as you thought. What seems like a nice nest egg doesn’t go as far as you might think when it comes to buying houses.

Real estate investing is complicated. Leveraging an IRA is for pros who know exactly what they are doing—and even then, it’s still a risk. When you are starting out, it’s very, very risky to stake your future. We asked above what are the risks if something goes sideways. Honestly, staking my nest egg on a volatile market gives me the heebie-jeebies.

Group of PeopleCrowdfunding

This is an old concept where a bunch of people get together to invest in something. Crowdfunding has been given new life thanks to the internet. There are an enormous amount of crowdfunding sites out there where regular people can throw a couple hundred at a stranger’s project and hope to get some money back.

What does that mean for you? It means that you can potentially find a lot of investors, none of whom have a huge stake in the project. It opens you up to a lot of avenues that might not have existed.

There are a lot of established sites that connect investors to the crowd. You can also set up your own sites and promote yourself to draw funding.
It’s kind of exciting, but it has some drawbacks (if you hadn’t guessed that already).

Pros:

  • No one single investor has a huge stake, so there isn’t one person breathing down your neck.
  • You’re selling yourself and promoting your talent, not trying to justify having stretched your credit card. It’s exciting and personally rewarding.
  • There are a TON of crowdfunding sites. It’s exciting for the investors to be a part of something, and a surprising amount of people are doing it.

Cons:

  • There could be serious security law issues with this form of funding. You will need to consult with a local real estate attorney to make sure you are in compliance with all laws.
  • There are usually higher rates. Everyone who invests gets a little piece, and that can add up.
  • If you are going through an established site, you have to pay their fees, too.
  • If you are self-promoting, you run the risk of no one finding you. Promotion costs money.
  • You have to stand out from the countless other people vying for the same eyeballs. It’s hard to stand out, whether on an established site or on your own.
  • You’re going to need to provide a lot of updates. Working with the crowd means being a crowd pleaser.

I think crowdfunding is exciting but it can be tricky.

Dollar SignHard Money Loans

Hard money loans are financial vehicles created specifically for real estate investing. It is basically a way to get cash—to get hard money into your hands when you have a deal you need to close.

There are a lot of hard money lenders out there. Their rates and terms are determined by a lot of factors. Some are concerned with your credit or your available cash. Some are interested in your work history. Some just give a flat rate no matter who you are. Some want high credit, some are designed for those with terrible credit. It all varies.

Pros:

  • They move fast. They are built for a fast-moving market, and it shows. With many of these lenders, you can get your funding in as little as two weeks.
  • They don’t exclude newcomers. Like I said, there are different rates for different levels of experience and success. Sure, it’s better to have sparkling credit and an unbroken string of profitable deals, but unlike banks, hard money lenders accommodate everyone.
  • They understand real estate. Not only are they interested in your deal, but they know the business. They know that bad credit doesn’t mean you’re bad at your job. It could mean you have a lot of irons in the fire. You don’t have to convince them that real estate is a good investment.

Cons:

  • Like we said, there are a lot of lenders offering a lot of loans. Applying to many lenders to get the right rate can be time-consuming.

There are a lot of types of hard money lenders. What they have in common, though, is that they want to lend to real estate investors.

The Best Way to Get the Best Hard Money Rates

As my career has progressed, I have come to learn more and more about hard money loans. They’re fast, they’re efficient, and the lenders understand my business. The one drawback—the time it took to find the right rate—was solved when I became an independently owned and operated HomeVestors® franchise.

HomeVestors has a proprietary hard money lending portal available only to franchisees. All I have to do is enter the details of my deal and almost instantly I generally get rates and terms from a bunch of different lenders. Then, I get to choose the best one.

There are so many real estate investment lending options out there, and when it comes to my favorite one—hard money lenders—the vendors compete over me. It’s less work for the best possible rate, and that’s true for rookies and pros alike.

There are a lot of ways to spend money. There are a lot of ways to get money, and they keep changing. I’ll be interested in how technology keeps expanding the options. I know that HomeVestors® proprietary technology allows me to take advantage of my favorite way to get—and spend, and hopefully make—money.

If you want the best rates from hard money lending to spark your real estate investment career, request information about becoming a franchisee today.

 

Each franchise office is independently owned and operated. 

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