There are a number of financing options for real estate investors. If you’re a newer investor, it might feel overwhelming to consider all the different methods, but it’s a lot simpler to choose a financing option when you consider what options are available and what your strategies are.
Here’s an outline of the benefits and costs of 12 financing options to help you make a better-informed choice. Read on, and find the option that best suits you and your deals.
#1: Private Money Loans
This type of loan is very similar to hard money, but the loan comes from someone who isn’t a professional lender. Instead of working with a public lender, you work with one person. A private lender may be more forgiving and understanding if you have a unique situation or come across a problem. The terms of the contract will be highly negotiable, but interest rates can be high if the lender wants higher returns on their cash.
Private money loans can be approved and funded very quickly, so you can make deals in a short period of time. Since private money loans give you cash to pay for property, you may be able to beat competition who may not have capital readily available.
Private money loans work well with real estate deals that require money quickly in order to close a deal. Private lenders can really take your real estate business up to the next level if they have the right resources. Chances are they will help you finance future properties if you build a good relationship with them, so they can be a powerful tool for real estate investors.
#2: Hard Money Loans
Hard money loans allow you to borrow without using traditional mortgage lenders. A lender will give you money without looking at your creditworthiness and uses the property value as security. One benefit with this method is that it’s available to borrowers with poor credit. An additional bonus is that if you repay on time, hard money loans can help to improve your credit profile.
Hard money loans generally have higher interest rates, but installment loans store Texas are typically extended for a shorter period of time, so the overall interest cost may not be very high. This is why hard money loans are often used for short-term financing and turnaround situations. Because each deal is evaluated individually, loan agreements can also be pretty flexible.
Nonetheless, keep in mind that hard money can get expensive and that things typically need to work according to plan for you to make a profit.
#3: Cash Financing
Cash financing is pretty much exactly what it sounds like-you pay cash for a property. This is probably the easiest way to finance a home because there are few complications. However, for the vast majority of new investors, paying all cash up front is just not an option.
If you do have enough cash to use it to finance, be aware that you’re going to lose a great deal of liquid assets. Additionally, any new mortgages on the property are considered refinances and carry a higher rate than a first mortgage would.
#4: Owner Financing
With owner financing, the person selling the property agrees to let you pay over time for the purchase price. Buyers make regular payments to the property owner until they repay the loan in full.
This can be an option if the buyer doesn’t qualify for a traditional loan, and agreements are highly negotiable when it comes to financing, down payments, and closing costs. If payments are made in a timely manner, the sale can improve the buyer’s credit score. Still, interest rates will probably be higher than what a bank would give out because the seller will want an incentive.