Tuesday, September 29, 2020

Best Strategies For Raising Real Estate Capital

Techniques & Strategies For Raising Real Estate Capital

Owning real estate has become synonymous with the American dream, and for good reason; almost anyone can do it. What is more: real estate is one of the best investment opportunities for individuals wishing to achieve financial freedom. The housing sector has continued to perform at a high level, and there are no reason people cannot get it on the action. All you need to get started is the right amount of passion, due diligence, and a sound real estate education. The last element missing from that list is capital. Have you ever wondered how to raise capital for real estate?

While capital is necessary to invest in real estate, there is no rule to suggest the money must come out of your pocket. You do not have to invest any of your own money at all. It is entirely possible to invest in real estate solely using other people’s money, or what I like to call OPM.

Having said that, if the money is not yours, to begin with, you must devise a strategy to attract investors who may be interested in funding your real estate ventures. To do so, you must learn to sell respective investors on yourself as much as the prospective property you are trying to take on.

The reality is venture capitalists are ready and willing to lend their money to those who can give them a solid return. Your mission, should you choose to pursue real estate investing, is to convince these investors that you can provide a solid return. Often, venture capitalists will gauge the viability of investment on one thing, and one thing only: you. As the person asking them for money, you must be ready to convince them beyond a shadow of a doubt that you are worth their time and money. Keep reading to learn more about how you can raise capital for real estate.

What Are Real Estate Ventures?

Real estate ventures are exactly what they sound like: entities that play an integral role in the development and financing of most large real estate projects. Joint real estate ventures, on the other hand, will witness two individual parties’ team up to take on a single project.

Investing in real estate ventures is one of the most profitable businesses among global investors. Real estate ventures can provide you several benefits including:

ü Equity for the future

ü High return on investment

ü Cash flow for retirement

ü Strategy for college funds

ü Hedge against inflation

ü Depreciation tax breaks

ü Property appreciation

ü How To Raise Money For Real Estate Investing 6 Different Ways

Real estate ventures need one thing, perhaps more than anything else: funding. Raising money for real estate deals is of the utmost importance, and it can be argued that it is the foundation of every deal. Therefore, investors must familiarize themselves with the most efficient ways to not only receive appropriate funding but also gain access to it in a moment’s notice. Note that learning how to raise capital for real estate is not as hard as it may seem — you just need to know where to look.

While there are plenty of ways to secure working capital, there are six sources investors have come to rely on more than any others:

ü Private & Hard Money Lenders

ü Self-Directed Accounts

ü Private Placement Memorandums

ü Wholesaling

ü FHA Investment Loan

ü Peer-to-Peer Loan

ü Private & Hard Money Lenders

Hard money lenders are organized semi-institutionalized lenders who are typically licensed to lend money to those in need. Private money lenders, on the other hand, are individuals with access to capital and a penchant for investing it. While these two types of lenders exercise subtle differences, they are unquestionably the most popular source of funding for today’s real estate investors. If for nothing else, these alternative sources of funding have become the easiest and most direct source of capital for real estate investing.

As their names suggest, private and hard money lenders are not associated with institutionalized banks, and therefore are not subject to nearly as much “red tape.” Instead, these lenders tend to work for themselves and are usually actively looking to lend out their funds to those in need. Thanks to their alternative nature, these lenders can award investors with short-term, high-rate loans based primarily on the subject property. Otherwise known as asset-based lending, private and hard money lenders will base their decision to lend money out on whether the property in question appears like a worthy investment. That means investors do not need to have a perfect credit score to receive approval, but rather a good work ethic with an even better subject property.

In return for granting access to their capital, most private and hard money lenders will ask for approximately twelve to fifteen percent in interest, and perhaps even a few additional points (a form of prepaid interest). Understandably, their rates are much higher than traditional banks (nearly three times higher), but these lenders can award investors with almost immediate access to capital. Banks, on the other hand, may take a long as one to two months to provide funds. In the time it takes to receive money from a bank, most opportunities are already lost. Therefore, the speed of implementation granted from private and hard money lender has made raising capital for real estate deals much easier than in years past.

Self-Directed Accounts

As perhaps the most overlooked—and perhaps even underutilized— source of capital, retirement accounts have served as an incredibly trustworthy source of funding for many of today’s real estate ventures. If for nothing else, far too many investors are unaware that they can even use their 401(k)s and Individual retirement accounts (IRAs) to invest in real estate. For what it is worth, the Internal Revenue Service (IRS) allows qualifying account holders to self-direct their savings into real estate investments without any sort of early withdrawal penalty. Of course, the account must be held by a custodian that allows account holders to self-direct their assets.

In the event their account can be self-directed, investors may use the funds in their retirement accounts to buy real estate. That said, any of the profits made must be returned to the account from which they originated. However, the profits will be permitted to grow tax deferred. Therefore, investors will not be able to spend the money immediately, but the resulting tax shelter can increase their profits.

Private Placement Memorandums

Easily the most misunderstood strategy for raising capital for real estate investing, private placement memorandums are, nonetheless, a great source of funding. As their name would leave many to believe, private placement memorandums are like private offerings. More specifically, however, a private placement awards real estate entrepreneur the ability to raise capital by selling securities to other investors.

Wholesaling

While not traditionally viewed as a source of funding, the practice of wholesaling has developed a reputation for awarding savvy investors with relatively quick funds. Perhaps even more importantly, utilizing the assignment of contract strategy may not even require any upfront funds. Executed perfectly, it is entirely possible to make money on a wholesale deal in as little as a few hours without using any of an investor’s own money. That said, wholesaling is an exit strategy, and is by no means guaranteed, but with proper knowledge of the industry, a promising subject property, and a dependable buyers list, wholesalers may be able to flip a few properties and invest the proceeds in a rehab. While not a traditional source of funding, wholesaling will certainly help investors interested in raising capital for real estate deals.

FHA Investment Loan

FHA loans are backed by the Federal Housing Administration and were created to help low to middle-income Americans purchase houses. Given their original purpose, you may be wondering: can FHA loans be used to invest in real estate? The answer is yes. FHA loans can be used to invest so long as the property serves as the applicant’s primary address. Essentially this means using an FHA loan to buy a multifamily property and living in one unit while renting the others. These loans can provide a unique opportunity for buyers willing to live on-site to begin generating rental income. As far as specifics go, FHA loans do require a credit score of at least 580, as well as a down payment of around 3.5 percent.

Peer-to-Peer Loan

A peer-to-peer loan is exactly what it sounds like: one investor loaning funds to another. This setup has become increasingly popular in recent years as more and more investors try to reap the benefits of real estate investing. Peer-to-peer lending typically takes place in an online marketplace setting. With most forms of real estate capital, the loan amounts, interest rates, and requirements will vary from lender to lender (and in this case platform to platform as well).

There are a few things to keep in mind as you learn more about the various platforms available. Always research data security, origination fees, and payback periods when considering your options. Research the details carefully to find the right platform and investor for your deal. Some examples to help you get started including Fundrise, Realty Mogul, Groundfloor, and Fund That Flip.

How To Secure Real Estate Investment Capital

Raising capital for real estate deals requires investors to know more than where to find sources; it also requires them to know how to secure the money once they know where to get it. Consequently, once investors have learned where to find the money they need, they must then learn how to appeal to those who have the money the need. Again, there are countless lenders simply waiting to lend their funds to today’s investors. However, it’s up to the investor to prove they are worth the investment.

Let’s take a look at some of the most important characteristics venture capitalists and private money lenders look for in those who want to raise capital for real estate ventures:

Show off your experience

Define your team structure

Explain the benefits of the opportunity

Seasoned Experience

It should go without saying, but the more investors are comfortable investing in you as a person, the more likely you are to receive capital. Experience goes a long way in establishing credibility, and therefore in raising capital for real estate investments. Nothing can instill confidence in those parting ways with a large sum of money than experience; the peace of mind it creates cannot be underestimated.

However, experience is not something every investor has the luxury of boasting. New investors, for that matter, have essentially no experience to offer at all. With that in mind, how can new investors compensate for a lack of experience?

It is important to note that even the most successful investors were once “green” behind the ears; nobody can boast years of experience right out of the gate. New investors are therefore advised to compensate for their lack of experience with preparation, knowledge, and acute attention to detail. You would be surprised at how far a little due diligence and drive can take even the most inexperienced investors. At this point, you must carry yourself with confidence; do not let your experience, or lack thereof, take centerstage on a given deal.

Venture capitalists and money lenders are looking to work with those that they feel comfortable giving their money to. If you cannot convince them with years of experience that you are the horse to bet on, do so by giving them peace of mind. Prove to those you are looking to borrow from that you have done your homework.

Team Composition

The best investors know real estate is a people business. Every single transaction requires the cooperation of at least two parties, if not more so. That said, if you want to learn how to raise capital for real estate ventures, you must work well with others, especially your team.

Private money lenders will place an emphasis on the rapport you have with your team, and for good reason. A competent team with the right leader is capable of just about anything. But what makes a competent team? What will money lenders look for in your team before they decide to give you the capital necessary to fund a deal?

Learning how to raise capital for real estate ventures starts with your team composition. Before you even consider asking for money, see to it that your team exhibits the following qualities:

Passion: The best teams exhibit a passion that is contagious. However, it is important to note that passion starts at the top and trickles down. To lead a passionate team, you, yourself, must be passionate about your future endeavors. Let people know how excited you are about the future of your company, and I guarantee people will be intrigued by the idea of working with you. At the very least, they will know your heart is in the right place.

Tenacity: Not all that dissimilar from passion, tenacity compliments passion and gives entrepreneurs the stamina to see their vision through to the end. Some say tenacity is all that separates a good investor from a great one. While the verdict is still out on that, there is no doubt in my mind that an inherent team tenacity can go a long way in convincing others to work on your behalf.

Flexibility: Entrepreneurs who are not flexible are inherently rigid. That said, rigid investors are more prone to suffering from complications because of their inability to adapt. Flexibility, for that matter, awards investors the opportunity to think on their feet and roll with the punches. The most prominent entrepreneurs of our time have all demonstrated an ability to be flexible; nothing has the power to mitigate risk quite like the ability to adapt to changing circumstances.

Commitment: Few things are more important to an entrepreneur than his or her team, and few things are more important to a team than commitment. Without commitment, even the most talented real estate teams can fall apart. As an investor, it is in your best interest to elicit unwavering commitment from those you choose to work alongside. At the very least, I can assure you potential investors will want to see a certain level of commitment from those they are entrusting their money to.

Teamwork: Otherwise referred to as chemistry, teamwork is essentially the barometer by which most outside investors will make their decision. A team that can work together without getting in its way is a force to be reckoned with, and venture capitalists are more than aware of its power. Prove to investors that you can work well with others, and they will most likely want to work with you.

“Coachability”: In my opinion, if you are not coachable, you are ignorant. For what it is worth, the smartest men are the ones who know they do not know everything. Humility can go a long way in gaining the trust of others. If you are willing to not only learn, but also admit when you are wrong, you will open a whole new world of working in tandem with others.

Knowledge: Perhaps more so than any other characteristics on this list, knowledge is power; it is your most important asset. Knowledge will see to it that everything is in working order. If for nothing else, a sound real estate education is the single most important trait a team can boast.

Opportunity

Again, one of the best ways to raise capital for real estate ventures is to convince money lenders that you are worth their time. For what it is worth, nothing will convince lenders to give you money faster than the opportunities you present to them. More specifically, the deal you are looking to fund should elicit some excitement. Remember, you are the one raising capital for real estate investments. It is up to you to make sure they want to lend you money. The house you intend to invest in should do most of the work. That said, run the numbers yourself and provide lenders with a reason to believe their money is not better off being spent elsewhere.

At this point, you will want to be upfront and divulge your intentions. Tell them how much you are looking for, and what an investment in your business could potentially return. Leave no stone unturned, as smart money lenders will want to mitigate their risk as much as possible. If they are asking questions you do not know the answer to, you have a lot more work to do. It is up to you to account for everything on a deal. If you can prove to them that you have dotted all your I’s and crossed all your t’s, the right opportunity will sell itself.

Investing in real estate successfully will require you to mitigate risk, and private money lenders are no exception. They are not in the business of throwing money away. They will want to make sure the opportunity you present them is a sure thing.

Summary

Understanding how to raise capital is an integral step to achieving financial freedom through real estate investing. Many investors focus so hard on highlighting properties, that they forget to present their strengths. While the property in question is technically what venture capitalists are lending money for, it is only a fraction of the total equation. Learning how to raise capital for real estate comes down to learning how to present yourself and your investing business. The key to financing a deal is demonstrating how you will take care of their money and return it with interest.

Is a lack of funds keeping you

from investing in Real Estate?

Do not let it!

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

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. © 2020 Level 4 Funding LLC. All Rights Reserved.

Monday, September 28, 2020

Guide To Income Generating Assets

Many successful entrepreneurs utilize income-generating assets to ensure multiple, steady streams of revenue. By maintaining a diverse portfolio of income-generating assets, investors can ensure they are generating consistent money over time.

The best thing about income-generating assets is that they are not exclusive to experienced investors. With the right research and planning, anyone can get started investing today. Whether you are fresh out of college or are approaching retirement, there are opportunities to build wealth with income-generating assets and achieve financial freedom. Keep reading for our list of assets that generate income and learn how to get started today.

What Are Income Generating Assets?

Investing in an income-generating asset involves paying money now to acquire an asset or account with the intent of generating more income in the future. These assets are attractive because of their ability to generate consistent, stable income over time. While it is rare to find investments that are entirely passive, income-generating assets often require medium- to low-levels of involvement. The time frame and potential returns will vary depending on the type of investment chosen.

It is important to differentiate income-generating assets from non-productive assets. A non-productive asset refers to investments that hold value without generating any further income. For example, while a car may be worth a lot of money it is not classified as an income-generating asset. Even if this asset appreciates in value because it is not creating cash flow it is not considered an income-generating asset. Some examples of income-producing assets include real estate properties and real estate investment

Getting Started

The most common way to start investing in income-generating assets is to rely on income from a primary job or money from existing savings. Investors can simply choose to redirect those funds towards an investment that will generate passive income over time. Aspiring investors should take time to do some financial planning and determine the level of funds they will be working with, and how to best devote them to potential income-generating assets.

If you are starting out with minimal capital, there are still options for getting started. Be sure to check out guides on how to raise capital and get more familiar with fundraising for investments. Many investors will take a more active role at the beginning of their careers to set a strong foundation for future income-generating assets. If the idea of raising capital sounds intimidating now, there are also examples that require low levels of money to get started. For example, savings accounts and CDs often do not require minimum net worth’s from investors.

One of the most important things to remember as you get started investing in income-generating assets is the importance of a diverse portfolio. The most financially savvy investors often have investments across different platforms. A diverse portfolio can serve multiple purposes, but perhaps most importantly it can offer a degree of protection in the event one of your investments is not profitable. Diversifying your investments can also stagger your income and help you receive regular revenue across different sources.

7 Assets That Generate Income

There are several types of income-generating assets ranging from real estate, stocks, savings accounts, certificates of deposit to private equity. Each of these is going to have its own pros and cons, which are important to keep in mind as you consider which will be best for your portfolio. As you review our income-generating assets list, try and consider the cost of entry, potential returns, level of involvement, and feasibility of each investment opportunity.

Finding the right combination of assets to achieve your financial goals will be entirely up to you, but by doing your research you can help ensure you are prepared to make smart investment decisions. Here are some of the most common income-generating assets to be aware of:

Real Estate Assets

There are several real estate investing strategies that can generate consistent revenue; however, one of the most common is investing in rental properties. This consists of purchasing a home or multi-unit property and marketing to tenants to earn rental income over time. Rental properties offer the opportunity to generate steady rental income over long periods of time. By hiring the right property manager, you can ensure your rental property runs smoothly—without a high level of involvement on your behalf.

One of the most attractive perks of investing in rental real estate is that it can enable investors to increase their wealth without significant capital upfront. Additionally, real estate investing can provide the opportunity to expand your portfolio more rapidly when compared to other investing opportunities. For example, you could purchase a single-family home to begin renting out. You could then use the income generated from this property to purchase another rental property, thus adding another income-generating asset and expanding your investment portfolio.

There are a few different types of real estate to consider, ranging from a single-family home to an apartment complex. The property type is based on the number of units available and depending on your investing goals some may seem more attractive than others. It is common for first-time investors to opt for duplexes, triplexes, or quads and live in a unit while renting the others. However, larger properties (meaning those with more units) typically signal larger amounts of capital required to get started and increased levels of involvement.

If you are intimidated by the prospect of owning properties, but still find yourself interested in real estate, REITs can be an attractive income-generating asset. Real estate investment trusts are like investing in stocks, but they are specifically real estate-oriented companies. Real estate investment trusts can specialize in apartment complexes, office buildings, storage units, or even parking garages. Entrepreneurs who choose to invest in REITs will be able to work in the real estate industry without walking through the up-front costs and set up of acquiring properties. Read our guide on REITs to learn more about how to get started.

Stocks

Stocks refer to investments in business equity and allow investors to generate income through several means, not the least of which are dividends. More importantly, dividends are rewarded over time and do not require a significant amount of capital to benefit from.

It is important to know the difference between investing in individual stocks and investing in mutual funds. Individual stocks represent the opportunity to buy single shares in a company, as a way to test out the industry. On the other hand, investing in mutual funds involves investing in different stocks across several companies. Because mutual funds are more diverse than individual stocks, they provide less risk; however, individual stocks can yield potentially higher results. If you are interested in investing in stocks, be sure to familiarize yourself with the stock market and get a better idea of the types of companies you may want to invest in.

Among the best income-producing assets is large-cap dividend investing. Commonly known as the “Dividend Aristocrats,” these blue-chip companies in the S&P 500 are known for consistent increases in dividend payouts. Dividend stocks derive from companies that are well past their growth state meaning they exhibit much more stability than younger, growing companies. While dividend investing can be a reliable income-producing asset, several tech companies, including the internet and biotech, commonly do not pay dividends. Most of their retained earnings are reinvested back into their company to maintain further growth.

Savings Accounts

Savings accounts are one of the most straightforward assets that generate passive income. Opening a savings account at your local bank will allow you to earn revenue from the interest your own money accrues over time. Depending on the type of account and interest rate, the potential income will vary. Typically, investors can expect between .01 and .30 percent back on the amount put into the savings account. While low-interest rates may result in lower returns (when compared to other income-generating assets), savings accounts do offer the benefit of liquidity. Investors will often be able to access these funds on short notice.

There are also high-yield savings accounts, which differ slightly from traditional savings accounts because of their high-interest rates. However, they are often only found at online banks, which leads to some downside. Investors may only be able to add money to the account through online transfers, and any support issues will often have to be dealt with online or over the phone rather than in person. The tradeoff between convenience and higher interest rates is something to consider as entrepreneurs' research savings account options.

Certificates Of Deposits

Certificates of Deposits (CDs) are considered time deposits and can be thought of similarly to savings accounts. Investors simply invest a set amount of money and earn income through interest accrued over time. The main difference between CDs and savings accounts is that CDs will require set amounts of time before investors can access the funds without penalty. Due to the required time frame, CDs will often have higher interest rates when compared to savings accounts. Investors may be able to find a five to seven-year CD with interest rates up to 2.5 percent. While the timeframe may be longer than expected, one of the great things about investing in CDs is that there are not income minimums to invest. This makes CDS one of the more accessible types of assets to invest in.

Private Equity Investing

Private equity investing refers to the practice of investing in private companies, many of which are in the early stages of development. This can represent an attractive opportunity, particularly if you find yourself in the midst of the next successful startup company. While private equity investing can offer attractive profits, there are several factors to consider. The most obvious is that it will take research on your part to identify the right companies to invest in. It is not uncommon for private companies to fail in their first few years, so mind due diligence as you look for businesses to invest in. There is also a lockup period for private equity investing. This refers to the time frame when investors will not be able to tap into the funds they invested. Lockup periods can range anywhere from six months to 10 years, depending on the company at hand. As you look into private equity investing, be sure to consider how a lockup period could potentially impact your finances.

Peer-to-Peer Lending

Peer-to-peer lending replaces the role of banks and helps denied borrowers receive a loan at lower rates than large-scale financial institutions. Peer-to-peer lending has now become a multi-million-dollar business and a viable income-generating asset. According to leading peer-to-peer lenders, investors can make five to seven percent in annual returns. As with most income-generating assets, peer-to-peer lending does come with moderate risk as some borrowers are known to break their contract obligations.

Building a Business

Among the best income-generating assets is a particularly interesting investment idea: opening your own business. This could be whatever you want it to be, a product for sale on Etsy or perhaps your own real estate investing business. Building a business is a great way to increase your cash flow, while also pursuing something you are interested in. Perhaps the biggest benefit is that you can devote as much, or as little, time as you want to this project. It could start as a side project to supplement your regular income, and one day turn into your focus.

There are numerous business options available that could be of interest to you. Perhaps some of the most common are opening franchises, whether for restaurants or gyms in your area. As you might expect, these businesses can take a lot of capital, time, and work before they begin operating successfully. An alternative business idea could be selling any of your skills online. For example, if you have experience in graphic design or copywriting you could pursue freelance opportunities until you have enough clients to start your own business. Another unique idea could be to buy and sell websites, through platforms such as Flippa.com.

Building a business of your own can ultimately turn into an excellent income-generating asset, it all depends on how much work you are able to put into it. I recommend researching new ideas, looking for a need in your market, and then finding a mentor to help with any questions you may have in the beginning. This route will take time to get started, but it could be a great way to pursue your passion while also increasing your overall income.

Which Are The Best Assets To Invest In?

As you familiarize yourself with the various income-generating assets on the market, you may be questioning which options are the best assets to invest in. The answer will depend on several factors including, but not limited to initial capital, timeframe, preferred level of involvement, and risk tolerance.

There will often be tradeoffs when selecting an income-generating asset to invest in. For example, while higher interest rates represent the opportunity to grow your money through a CD, there may be a period where you cannot access those funds. On the other hand, individual stocks can yield attractive results when managed correctly, but they do involve more risk. With any investment decision, it is important to weigh the pros and cons of each opportunity, as to ensure you get the results you are looking for.

Among the top income-generating assets, you may notice a trend: many opportunities will depend on the regulation of interest rates or your ability to predict stocks and business performance. These be barriers to entry for entrepreneurs looking to get started in investing. Real estate, on the other hand, is often dependent on the local market and the ability to find tenants. Due to these factors, real estate investing can represent an excellent source of passive income with relatively low barriers to entry. Investors willing to pursue real estate may even find they are able to grow their portfolio more rapidly over time when compared to more slow-moving income-generating assets.

Summary

No matter where you are in life, you can get started building wealth by investing in income-generating assets. There are numerous examples of income-generating assets that investors can choose from to yield profitable returns. With the right dedication, many entrepreneurs will find real estate offers attractive returns. By minding your due diligence and choosing the right income-generating assets, you can get closer to your goal of financial freedom.

Ready to start taking advantage of the current opportunities in the real estate market?

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

Unconventional Home Loans For Buyers And Investors

One of the biggest mistakes potential homebuyers can make is assuming that they cannot qualify for a mortgage. There are numerous unconventional home loan options available to make buying property possible for more consumers. Even without the perfect credit or the money for a large down payment, you may qualify for these loans. Read on to find out what constitutes a non-conventional loan, how to qualify, and pro tips on how to proceed if you want to buy a home with a non-conforming loan.

What Is An Unconventional Loan?

A non-conventional loan, or mortgage, is a type of loan that does not have to follow traditional mortgage loan requirements. Non-conventional loans sometimes refer to non-conforming loans. Conventional (or conforming) loans use wide sets of qualifications and eligibility, such as credit scores, loan amounts, and debt-to-income ratios. Also, most conventional loans require a 20 percent down payment minimum or private mortgage insurance payments.

Non-conventional home loans offer more flexible qualification requirements, oftentimes because they have been backed by the government. The Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture are all federal agencies that ensure these non-conventional loans to encourage homeownership.

Conventional Vs. Unconventional Loans

One of the main differences between conventional and unconventional loans is the credit score and down payment that they each require. Private lenders offer conventional loans and require buyers to have an excellent credit score.

Conventional loans are either fixed-rate or adjustable. Fixed-rate mortgages’ interest rates will not change. Adjustable-rate mortgages often begin with a lower interest rate and lower monthly payment. However, a change in property taxes or your homeowners’ premium results in an increased interest rate.

Government programs back unconventional loans and have lower credit score requirements and larger down payment. However, the loan limits of unconventional loans are also lower.

The two main types of government-backed unconventional home loans include FHA and VA loans. The government ensures FHA loans allowing for lower requirements to obtain these loans. Veterans Affairs Loans (VA) are reserved for military members and their families. These loans may allow for no down payment at all, but ultimately the VA will handle the approval process.

Types Of Unconventional Loans

Depending on how long you have been in the real estate industry, you have likely heard of various non-conventional loans. These loans have atypical approval requirements. Read through the list below to familiarize yourself with the various types of nonconforming loans available:

FHA: Loans secured by the Federal Housing Administration are one of the most popular non-conforming loan types. This is because of the low-down-payment requirements. Moderate income homebuyers can benefit from these loans, but they include some credit score guidelines. The application process of FHA loans is universally accessible because most mortgage providers issue them.

USDA: The U.S. Department of Agriculture backs USDA loans with the intention to develop rural areas. Loan applicants must be looking at property in a town with less than 20,000 inhabitants to be eligible. Other requirements include a stable income, and a credit score of at least 640. In addition, the property must be the borrower’s primary residence.

VA: Active-duty military personnel and certain veteran groups can apply for a VA loan through the U.S. Department of Veterans Affairs. One of the biggest benefits of this loan type is that they do not require a down payment. Read this article to learn more about VA loans and how to apply.

Crowdfunding: Crowdfunding is arguably one of the most interesting developments to come from new technologies in the real estate industry. The process refers to raising money for a property from groups of people, rather than a single loan. The breakdown of homeownership will vary depending on the stipulations established at the time of fundraising; however, this is an interesting option for investors and even first-time homebuyers to consider.

Seller Financing: This arrangement involves loaning the money for a property directly from the previous owner, who is selling the home. This non-conventional set up is attractive because it can allow homebuyers to bypass strict mortgage requirements. However, it is often in exchange for higher interest payments. Often, the properties do not advertise seller financing, so do not be afraid to ask. Make sure you have a concrete pitch when you do.

Private & Hard Money Lenders: Private and hard money are two of the most common sources of financing among today’s real estate investors. This route involves finding an investor to act as a lender and finance a property; as the buyer, you would then pay back the loan with interest directly to the lender. Again, this nonconforming financing method is a great way to work around potentially stricter mortgage approval requirements.

How To Qualify For An Unconventional Mortgage Loan

Non-conventional home loans facilitate homeownership opportunities for individuals who may not qualify otherwise. You will find easier requirements with these loans than their conventional counterparts. Down payment requirements for non-conventional mortgages can be as low as three percent, while acceptable credit scores in the 500’s.

It is important to note that the specifics of non-conventional mortgages will vary from type to type. Keep in mind that not everyone will qualify for every type. Some non-conventional loans include demographic limits, such as eligible military veterans and their family, or low-income homebuyers in rural areas.

As mentioned earlier, loan products that do not conform to the requirements of conventional loans are non-conventional mortgages as well, even if they are not backed by the federal government. According to NerdWallet.com, nearly half of home loans are now provided by alternative mortgage lenders. This shows that the demand for non-conventional home loans is significant and growing.

Investors hoping to secure non-conventional home loans can rely on the performance of other properties when raising funding. Depending on the loan’s source, investors can present numbers from past real estate transactions to establish rapport with lenders. Different non-conventional loan types will fit into three main sources: online lenders, marketplaces and brokers, or non-bank lenders. Investors should frame their approach depending on the source of the potential loan.

Online Mortgage Lenders

Chances are, you have seen at least one commercial for Rocket Mortgage on the television. Quicken Loans launched Rocket Mortgage – one of the most substantial companies in a new generation of online mortgage lenders. Online lenders are offering consumers with a mortgage and refinancing approvals in a matter of minutes, using loan-decision algorithms. These programs appeal widely to millennials, today’s largest group of homebuyers, who prefer to shop for products online and receive instant gratification.

Marketplaces And Brokers

As the concept of online mortgage lenders, many popular sites such as Zillow or LendingTree offer consumers a list of potential loan products to choose from. An algorithm performs a search that takes the shopper’s basic information and matches nonconforming mortgage rates and products that lenders offer. The consumer then selects their preferred product and works directly with the lender to finish processing the application. In turn, these marketplaces, and brokers, which can be thought of as middlemen, receive a fee for providing lenders with leads.

Non-Bank Lenders

Small lenders and credit unions provide an alternative to home buyers who have less-than-perfect credit. Because these entities often do not face as many federal regulations as their counterparts, the banks can provide more flexible options to consumers. As a result of the housing crisis, many big banks have decreased their roles in mortgage lending, limiting their products to the most qualified borrowers. In recent years, non-bank lenders have increasingly filled this void.

How To Buy A Home With An Unconventional Loan

It is easy to get discouraged when you want to buy a home, but cannot see the light at the end of the tunnel when it comes to paying off debt or saving up enough funds for a down payment. However, it should be known that non-conventional mortgage loans have become increasingly popular, making homeownership more accessible to those who cannot or do not want to take out a conventional mortgage. Follow the steps below if you are interested in buying a property with a non-conforming loan:

Compare online mortgage lenders: Online lenders tend to offer flexible product options, compared to their brick and mortar counterparts. Spend time comparing online mortgage lenders that provide loans for those with lower credit scores or require a lower down payment. It should be noted that interest rates will often be higher, and shoppers should mind their due diligence and perform thorough research before deciding.

Meet with a credit union: Credit unions are oft-forgotten by borrowers but are institutions that often offer great deals when compared to traditional banks, especially if you are a long-time member. Sit down with a representative with your credit union and go over their lending programs, including first-time home-buying programs, and you may be able to obtain great terms.

Identify an alternative solution: New home buyers should not automatically write off traditional lenders and should always sit down for a meeting at the very least. In some cases, a lender may be willing to work with home buyers to come up with a creative solution, such as offering to combine a graduates’ student debt with their mortgage payment, or increasing the loan-to-value ratio on the loan. For more alternative solutions, review the non-conforming loan types listed above.

Summary

Today’s economic landscape can make maintaining perfect credit and saving up 20 percent for a down payment a challenge for many aspiring homeowners. The burden of student loans, skyrocketing costs of living, and ever-increasing property values can make the goal of homeownership seem even farther away. However, by considering an unconventional home loan buyers have to access to more flexible, creative options. These unique financing methods have enabled countless individuals to achieve their goals of homeownership.

Is a lack of funds keeping you from investing in real estate? Do not let it!

Hard Money Lending For Real Estate

Understanding the basics of hard money lending represents the first step of breaking down real estate financing. Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.

When exploring real estate hard money lending, you need to comprehend several questions: What are the pros and cons of such a strategy? When should you use private financing for real estate? Where can you find hard money lenders for real estate? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.

What Is Hard Money Lending?

Many investors looking for alternative financing that doesn’t involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple follow up question: what is hard money lending?

Hard money lending is a short-term loan obtained from private investors or individuals, at terms that may be stricter than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.

Investor Q&A: What Is Hard Money Lending?

1. The Big-Picture Of Hard Money Lending

Hard money lending is another way an investor can finance their real estate projects, outside of the traditional mortgage means. This is a short-term loan secured from private investors or individuals, as opposed to other traditional institutions like banks or credit unions.

Hard money lending is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers. This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.

2. Hard Money Lending Vs. Other Lending Types

The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, placing emphasis on its after-repair value (ARV). ARV is the worth of the property once your renovations are done.

Other differences include:

Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.

Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. Often, lenders use their own money or raise it from a pool of investors. The amount they loan are based on their property specialization (if there are any) and the risks they are comfortable taking.

Hard money loans are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans are typically needing to be repaid anywhere between 6 to 18 months.

Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.

The Pros And Cons Of Hard Money Loans

I maintain that hard money loans represent one of the single most advantageous funding opportunities for investors to take advantage of. Few sources of capital, if any, can compete on the same level as hard money and offer the same competitive edge. It is hard money loans, after all, that many investors must thank for acquiring their deals in the first place. That said, hard money is not without its own caveats. Despite its superior benefits, there are downsides to hard money that warrant the consideration of every investor.

Let us look at the pros and cons of hard money so you can weigh the pros and cons yourself.

Pros

Securing financing with a hard money lending loan offers you a number of benefits, including:

Speed: The Dodd-Frank Act is a financial reform legislation enacted in the past decade. It came with new regulations on mortgage lending, which then means a lot of time (often, months) is needed for an investor to close a loan. Hard money lending, on the other hand, is fast, as you can secure a loan in a days or weeks (depending on negotiations). Time is of the essence, especially for large development projects, and hard money lending can help speed that process along.

Flexibility: Terms can be negotiated with hard money lending loans, since you are dealing directly with individual investors. Banks are not as flexible.

Collateral: With hard money financing, the property itself is your collateral for the loan. Some lenders even accept other assets, like your retirement account or a residential property under your name, as a basis for starting a loan.

No “Red Tape”: Getting a loan for an investment property with a traditional mortgage is difficult, if not impossible. Traditional borrowers need to worry about credit score, LTV ratios, debt-to-income, and several other indicators they need to meet criteria for. Hard money lenders, however, function as asset-based lenders who are more concerned with the property than the borrower’s credentials.

Convenience: There is something to be said for the convenience of being able to close with cash. Having to supply a lender with bank statements, income documentation, tax returns and leases can become overbearing and consume your focus and energy. Hard money, on the other hand, cuts out the middleman and a lot of the headaches.

Volume: Hard money lenders allow investors to leverage other people’s money. That means investors could potentially fund more than one deal at a time. Traditional loans will do no such thing. If you want to fund multiple deals at a time, you should really consider a hard money loan.

Competitive Edge: Hard money allows investors to beat out the competition, or at least those using a traditional loan. If for nothing else, sellers prefer the two things hard money offers: cash and a timely transaction.

Cons

There are, however, certain disadvantages to using hard money for real estate investments:

Cost: The convenience that comes with hard money lending may be its primary benefit; however, it is also its main drawback. Given that hard money lenders are at higher risk than borrowers, many may demand up to 10 percentage points higher than traditional loans. Interest rates range from 10 to 15 percent. Expect other fees to be also at a relatively increased rate, including origination fees and closing costs.

Short Repayment Schedule: A shorter repayment period is the price to pay for being able to get a property listed on the market ASAP. This can be anywhere between 6 to 18 months. Make sure that you can sell the property and profit in the soonest time possible.

When To Use Hard Money For Real Estate

Though hard money lenders will often issue loans for almost any type of property, there are certain types of property investments which were absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.

This does not mean that other types of investments should not be financed through hard money. If you, the buyer of a property, has credit issues, or you need to act quickly on a deal before it disappears, the speed and convenience afforded by a hard money loan can be worth its weight in gold.

Finding Hard Money Lenders For Real Estate Investing

Many new investors fret over how they will find hard money lenders to get moving on the financing of their project. But here are a couple of simple ways to approach this:

REIA or Meetup Meetings: Often hard money lenders will speak at local real estate events. If not, ask fellow members to see if they know any trustworthy lenders.

Real Estate Agent or Traditional Lender: Ask that realtor, or mortgage broker, in your real estate network if they know a hard money lender you could do business with.

Google “Hard Money Lender”: Just be careful, there are some unscrupulous individuals out there. Be sure to ask for references and talk to fellow investors to get their opinion.

How Does Hard Money Lending Work?

Given that these are private individuals, every hard money lender is different. As stated above, these lenders come with their own requirements, which include the process they need to close the transaction.

To give you a general idea, this is the usual course hard money lending takes:

Step #1: Find a hard lender near you. Do not let the rejection of a bank loan drive you to desperation. Research and make sure the lender can be trusted. Do they have a legitimate website? Are they in good standing with their own investors? Do they have pending lawsuits over bad loans?

Step #2: Arrange a meeting with the lender. This is also the time when you can inquire whether they specialize in a kind of investment property or if they have worked with projects previously that mirror yours. Assess the time frame specified for the loan and see if this is something you can work with.

Step #3: Prepare a contract. Make sure that you are offering a good deal with a sound financial plan.

Step #4: Inform the lender of your contract price. Most lenders are willing to fund 60 to 70 percent of the property’s ARV. The remaining 30 to 40 percent is up to you. You will increase your chances of getting approved if you already have this at hand.

Step #5: Get the property appraised. The lender will either send a list of their trusted appraisers or have their own.

Step #6: Prepare additional documents needed. Some lenders may require that you present other documentations, like W-2s, bank statements, pay stubs, etc.

Step #7: Wait for lender’s approval. If it is a deal that the lender finds satisfactory, then they will inform you of the amount and terms for payment.

Step #8: Consult with a lawyer. Make sure that you are legally protected, especially after getting the lender’s counteroffer.

Step #9: Close the loan. This will be done typically at a title company or a lawyer’s office. The lender will then put the money into escrow at the title company. The title company would make sure all paperwork is completed, and that checks issued to all parties involved. Additional costs may include any closing fees and property insurances.

Often, lenders grant money to properties that will not be in the market for long, that have good selling potential. Make sure your team budgets ample time to complete renovations. There is no sense in coming up with unrealistic projections. This cannot only set you back financially, but possibly burn a possible future relationship with your hard money lender.

Summary

Using hard money lending for real estate acquisitions has become commonplace in the housing sector. If for nothing else, a hard money loan gives investors an edge over those that are using traditional financing methods. Not only should hard money borrowers be able to secure capital faster, but sellers will also favor their offers because they are made with cash. That said, if you are looking to fund a deal, you may not want to ignore hard money; it could be the one thing that gets you what you need.

Have you ever bought an investment property with hard money? What was your experience like? Feel free to let us know how things went in the comments below.

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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.
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