So, you’re looking to make money in the real estate game. Good for you. There are lots of ways to do it: house flipping, commercial leasing, property development, and even investing in property funds. All but the property fund option requires upfront financing. Where will it come from?
Imagine you are looking to buy a set of two apartment buildings with four units each. This is your first foray into both real estate investing and being a landlord. You have managed to save the obligatory 20% for a down payment; now you need a loan to cover the rest. You have options. Below are five of them.
1. Hard Money
We start with hard money because it is one of the most popular options among real estate investors. According to Salt Lake City-based Actium Partners, real estate investors are big on hard money because lenders work quickly and base their decisions primarily on collateral.
The two apartment buildings will be collateral for a hard money loan. Depending on the lender you choose though, 20% may not be enough for your down payment. It really depends on the lender’s LTV ratio.
2. A Bridge Loan
A bridge loan is similar to hard money in some respects. What makes it different is that it is purposely designed to be short-term. You would obtain a bridge loan with the understanding that, after closing, you will start looking around for traditional funding to pay off the bridge loan.
3. A Conventional Mortgage
Another way to fund your burgeoning real estate investment portfolio is to apply for a conventional loan. Such loans are not easy to come by, but you may be in a good position if the total rental value of all eight units is enough to satisfy bank concerns. The advantage of a conventional mortgage is that you will have a longer term. You can usually get terms of 10, 15, or even 30 years.
4. The Equity in Your Home
Perhaps you hope to stay away from the commercial banking arena altogether. If so, you might be able to leverage the equity in your home to secure a mortgage. A straight up home equity loan is one option, but it is not likely to provide enough funding. Another option is to take out a mortgage adviser in Essex.
Just know that with this type of funding, you’re putting your primary residence on the line. The lender will put a lien on your property, a lien that must be satisfied before you can sell the house. You would be wise to pay off that second mortgage or home equity loan before you do anything else.
5. Peer-to-Peer Lending
Peer-to-peer (P2P) lending was all the rage just five years ago. It is not as popular as it once was, but it’s still out there. P2P lending is a form of private lending through which at least several individuals pool their financial resources to make loans to clients.
Like hard money, the big advantage of P2P financing is speed. Lenders don’t need weeks or months to close a deal. If your application is in order and your collateral is strong enough, funding can be accomplished in a matter of days. But remember this: P2P lenders are not subject to all of the same requirements that banks and hard money lenders adhere to. You have to be careful about choosing a P2P lending partner.
You now know five ways to fund your first real estate deal. Provided you make a good deal, your first project could very well lay the foundation of what eventually becomes an extensive real estate portfolio.