Properly investing in real estate provides numerous benefits including financial stability, positive cash flow, wealth creation thru appreciation of the underlying asset, tax benefits, etc… Unfortunately, too many individuals are often overwhelmed and do not know where to start especially when it comes to where to find the money to invest in real estate.

In this article, we will present a few (out of many) of the financing options available to finance the acquisition of your 1^st or next investment property.

Reach out to us by calling/texting at 832-409-4820 if interested in learning more or joining our real estate investment group.

All Cash Purchase

If you have been able to save money or received a large gift or heritance, this is certainly an option for you. However, paying all cash for a property might not provide the best return on investment. If you have a large sum of money (let’s say $100k or $200k), splitting that money in 3 or 4 to purchase multiple houses or a multifamily property using down payment(s) and financing the rest will generally provide much better returns in the long term.

Conventional Mortgages

Conventional mortgages for investment properties are mostly similar to financing the purchase of your primary residence. However, one major difference is that most lenders will require at least 20%-30% down payment for an investment property. These loans will usually come from banks, credit unions, etc…the lending institution will often resell these loans to (or get funds from) government backed institutions like Fannie Mae or Freddie Mac to replenish their coffers with additional funds to lend. The involvement of these government institutions often create strict rules and guidelines that could make it difficult sometime for individuals with less than stellar credit or good W2 income to qualify for these loans.

Portfolio Lenders

These lenders could also be banks, credit unions and other financial institutions. They generally provide loans using their own funds and thus could have lower criteria for qualification but the interest rates could be higher than with conventional loans.

Hard Money Loans

These are short term loans (generally 6-18 months and often interest payments only) traditionally used to acquire a property, quickly rehab it, then resell for profit or refinance into a long term loan for buy/hold investors. Hard money loans have a higher interest rate compared to conventional loans. The criteria for qualifications are usually more focused on the quality of the real estate deal instead of the creditworthiness of the applicant. This financing option is frequently used by individuals with low credit scores and/or little W2 income.

Private Money

This is usually the family and/or friends funding source. Some aspiring real estate investors will often approach their family members to get loans to purchase real estate with the promise of return of the funds with interest. This is similar to hard money lending except for differences in professional structure and the existence of a personal relationship. Giving loans (or taking loans) from family and friends can create tremendous strain and often destroy relationships. Don’t do it…unless there is very clear and professional approach with a legally binding contracts (executed with lawyers and/or notary) with promissory note and/or mortgage on the acquired property which makes the investor the beneficiary if you are unable to repay for whatever reason.

Partnerships

Partnerships are great vehicles to join forces with like-minded individuals for the purpose of investing in real estate. Partners will usually create an entity such as an LLC that will own the acquired property and each person will own shares of the LLC in proportion to the funds and/or efforts they are bringing to the table.

Home Equity Lines of Credit (HELOC)

For those who purchased their home a while ago and/or have benefited from a great appreciation of home values in their neighborhood, this could be a great source of funding for real estate investment. But, be very careful as this is equivalent to taking on a 2^nd mortgage and you will now have 2 payments on your house (the existing mortgage payment & the new HELOC payment). The investment you make must produce returns that exceed the interest rate of this HELOC. Many new and experienced investors have successfully used this strategy to start or grow their portfolio. With an HELOC, you can receive up to 80% of the amount of equity you have on the house. For example, if you own a home worth $300k and your mortgage balance is $100k, your equity is $200k. An HELOC can lend you up to $160k (80% of $200k equity) as a lump sump sent to your bank account. 

In conclusion, they are many others ways to find capital for real estate investments. Depending on the deal, financing could require using a combination of techniques above to maximize returns. Get out of your comfort zone, educate yourself and take steps to achieve financial freedom for you and your family…Happy Investing.