A Guide To Real Estate Financing
As a beginner investor, understanding how to finance a deal
is just as important as finding one. A lack of real estate financing continues to
hinder most new investors in today’s market, simply because they are not aware
of the different financing avenues. Whether you have access to working capital
or not, there are always ways to acquire capital.
Investing in real estate is
never a bad idea. It offers potential investors a slew of financial and
personal benefits such as increased cash flow, home appreciation and tax
benefits. In fact, real estate investment continues to be one of the most
popular vehicles in producing financial wealth. According to the IRS,
approximately 71 percent of Americans that declared more than a million dollars
on their income tax returns in the last 50 years were in real estate.
Ironically, beginner investors face the challenge of learning how to obtain
real estate investment financing before they can start creating wealth. Read on
to learn about some of the most common types of real estate financing options
out there, as well as prominent loans for real estate investing.
What Is Real Estate Financing?
Real estate financing is a term generally used to describe an
investor’s method of securing funds for an impending deal. As its name
suggests, this method will have investors secure capital from an outside source
to buy and renovate a property. Not unlike traditional financing, however, real
estate financing comes complete with terms and underwriting, not the least of
which need to be fully understood before entering a contract.
How To Obtain Real Estate Investment Financing
One of the biggest misconceptions of real estate investing is
that you need to have a lot of money to get started, which simply is not true.
The secret that many professionals do not understand however, is the fact that
there are a multitude of different real estate financing options available to
fund every investment. Because the method in which a specific deal is funded
can greatly impact its outcome, understanding the financing aspect is
imperative.
As an investor, there are a few different ways to go about
financing real estate investments. Each one will have its own set of pros and
cons, and your financing approach will depend on the property and the
situation. For beginner investors, it is important to remember that not all
real estate investment financing options are created equal. What works for
someone else may not necessarily work for you, but the trick is understanding
which real estate financing option will compliment your business strategy. By
taking the time to research the various real estate financing options out
there, new investors are sure to realize how accessible investing can be.
Broadening one’s toolkit of real estate investment financing options is simply a
matter of being knowledgeable about what strategies exist, as well as proper
ways to leverage them. Keep in mind that all investors have faced the financing
hurdle at some point in their career; when in doubt, there is nothing wrong
with tapping into your investor network and ask for advice.
Real Estate Financing Options
Investors with a deal lined up have already accomplished one
of the most important steps in home
flipping. However, finding a viable deal is only one piece of the puzzle.
Once you find a good property to invest in, you need to then be able to finance
the impending transaction.
Financing a real estate deal tends to send new investors into
a fit of anxiety or is even enough to compel them to pack up their dreams and retreat
to their nine-to-five job. However, if an investor commits to doing his or her
due diligence, the fear of a lack of funds is irrational.
If you have a great deal on the table, there is no limit when
it comes to ways to fund it. A great example would be leveraging a self-directed IRA,
which would require some careful consideration beforehand; however, it goes to
show that there are many available options for real estate investment
financing. For investors wondering how to finance an investment property, I’ll
explain some of your real estate financing options:
Cash Financing: Great
for investors who have access to a significant amount of capital, either
personally or through their network, and wish to purchase properties free and
clear.
Hard Money Lenders: Accessible
to investors who have less-than-perfect credit or financial history and need a
short-term loan.
Private Money Lenders: Investors
who are well-connected can often tap into capital from personal connections,
borrowing money at a specified interest rate and payback period.
Self-Directed IRA
Accounts: Individuals who have elected to create savings through a
self-directed IRA may make the decision to tap into their account as a way to
access capital.
Seller Financing: Buyers
and sellers can sometimes strike up a mutually beneficial agreement, allowing
the investor and seller to avoid having to go through a private lender
altogether.
Peer-To-Peer Lending: This
is a great option for investors trying to raise the last portion of funding for
a project. Peer-to-peer lending can offer high flexibility and low interest rates[DD1] .
Cash Financing
As an investor, cash is a monumental tool to getting what you
want. Along with getting more offers accepted, cash financing enables investors to
save on interest, increase their cash flow, and receive instant equity in their
investment. It also could save investors on the purchase amount.
In the first quarter of 2016, all-cash homebuyers for
single-family homes and condos paid, on average, 23 percent less per square
foot than all homebuyers nationwide, according to RealtyTrac.
In addition, it is important to remember there will be times
when paying cash for a property makes sense and other times when other
financing options should be considered. If you have your own capital, however,
you should always consider using it in the best possible scenarios.
Hard Money Lenders
Funded by private businesses and individuals, hard money lenders provide short-term,
high-rate loans for real estate investors. This financing option, which doesn’t
conform to bank standards of creditworthiness, is typically used by rehabbers
looking to renovate a property.
Hard money financing is
generally determined by the value of the investment property itself, with
lenders analyzing the “After Repair Value” (ARV) to determine the size of the
loan. Hard money lenders generally will
not fund an entire deal, but rather fund a percentage of the purchase price or
the after-repair value, which will range from 50 to 70 percent.
Hard money lenders also charge fees apart from the interest
on the loan. These fees are generally delineated in points (three to five),
which represent additional percentage fees based on the loan amount. In
general, hard money lenders charge
much higher interest rates – sometimes double the amount of a traditional
mortgage, plus fees. In the end, all hard money lenders will have different
requirements and real estate investors need to be fully aware of what they are
getting themselves into.
Private Money Lenders
Private
money lenders are integral to the growth of every new investor. They
have the means and intent to invest capital into your business, and they are
just as interested in working with you, as you are with them.
Generally speaking, private
money lenders will provide investors with cash to purchase real estate
properties in exchange for a specific interest rate. These terms will generally
be established up front and with a specified payback period – anywhere from six
months to a year. These loans are most common when investors believe they can
raise the value of a particular property over a short period of time, typically
through renovations. It is also important to understand that, like hard money, private money should only be used when
you have a clearly defined exit strategy.
Self-Directed IRA Accounts
A self-directed IRA (Individual
Retirement Account) is, at its most basic level, a savings account that allows
for compounded, tax-free growth, over time. Self-directed IRAs are unique from
other types of savings accounts, such as a 401K, as the owner can control a
wide array of investment options, including real estate.
Owners of self-directed IRA account enjoy a unique benefit of
being able to purchase, rehab and sell properties while still being able to
defer taxes. However, it is important to note that owners under the age of 60
are typically subject to a penalty for withdrawing funds early.
Seller Financing
There are some scenarios when both an investor and a seller
can strike up a mutually beneficial seller financing deal. In seller financing,
the buyer of the property will make payments directly to the seller of the
property, rather than going through a bank. This can help a motivated seller
sell the property more quickly, and the investor can avoid having to jump over
traditional mortgage lending hurdles, such as financial and credit score
minimums.
Together, the buyer and seller can often enjoy a faster
transaction process, as well as avoid many costs and fees associated with the
closing process. Furthermore, the owner has the option to sell the promissory
note if they no longer want to manage their own owner financing.
Peer-To-Peer Lending
Peer-to-peer lending allows investors to borrow money from
other investors, or groups of investors (hence the name). The basic process can
be thought of similarly to hard or private
money lending, though the specifics are quite different. Like these
methods, investors can bypass the strict requirements of traditional funding
and allow their portfolios to do the talking.
This form of real estate
financing does typically involve a lower loan-to-value ratio when compared
other types of funding. This often prevents investors from borrowing the entire
loan amount needed to purchase a property; however, do not be afraid to seek
out the financing you need. Peer-to-peer financing offers a high degree of
flexibility overall.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
© 2019 Level 4 Funding LLC. All Rights Reserved.
No comments:
Post a Comment