So, you’ve found a great property. You’ve done your due diligence, and everything checks out. But, how do you pay for it?
Well, there’s no straightforward answer. The ideal financing option for you will depend on your unique circumstances and financial position.
The good news is there are several ways you can go about property investment financing. We’ll cover some of these in this article.
#1 Cash funding
Cash funding offers are arguably one of the best ways to finance a property investment deal. The reasons for this are simple. Cash is quick, and it eliminates the need to involve banks that could hinder the sale.
More on that below
Lower closing costs
One of the benefits of buying a house with cash is that it significantly reduces your closing costs. Paying cash for a property will eliminate the obligations that come with a mortgage. You won’t need to pay origination fees, lender fees, mortgage insurance, title insurance, or any other fees associated with financing a rental property.
Quicker purchase process
Another reason to pay cash for a real estate asset is that it quickens the buying process. A typical mortgage process can take from 30 to 45 days. Buying with cash allows you to avoid this inconvenience.
Equity
Purchasing a house with cash gives you total control of its equity and potential appreciation. Let’s have an easy example; if you buy a property for about $200000 and see a %10 increase in equity due to appreciation, you’ll own all that value along with the monthly cash flow from rental fees.
#2 Crowdfunding
You’ve likely heard of Gofundme or Kickstarter campaigns. Real estate crowdfunding is built on similar logic. All you need to do is present your idea on a suitable crowdfunding platform, and people will invest in your project as they see fit.
Real estate crowdfunding is a relatively new way to purchase real estate assets. Although it’s a great way to raise the large sums of money you would need to buy or flip a property, there are several considerations you need to address before you get started.
Real estate crowdfunding usually works on the premise that your investors will get a share of the profit from your venture. You need to consider what percentage you’ll give them, the payment timeframe, or whether you will be giving them equity/ a part of your company.
It’s also worth noting that once you cross the 100-investor threshold, your venture will be legally considered a Real estate investment trust (REIT), which means you will have to adhere to all applicable rules and regulations.
Even if your venture falls within the required threshold for crowdfunding, you will still need legal protection. This is particularly true if you plan on giving each investor equity, which means instead of a return of interest for their support, they get to own a piece of the project. You should clearly specify who the full partners (those with control over the enterprise) and limited partners (those who make financial contributions but have no control over the project are)
#3 Delayed financing
Delayed financing is a situation where you get a mortgage after buying a property with cash. The beauty of this approach is that it lets you make attractive cash-payment offers to home sellers (doing so gives them assurance that the deal will close) and keep your investment money at the same time.
The rules on delayed financing change when you’re doing it for an investment property instead of a primary residence.
The maximum loan-to-value ratio is usually lower for such assets. There are also several other qualification requirements, as outlined below.
Your initial property acquisition must be an arm’s length transaction. This means you must have no relation to the seller, and the transaction must not have been influenced by another party. For example, you should not use this method to purchase real estate from a relative, friend, or colleague.
- You must prove that you purchased the real estate asset with cash, not loans secured by the property.
- you will be asked for closing documents like grant deeds and settlement statements
- The bank wll request documents that verify the source of funds you used to acquire the property in cash.
- The investment property should not have outstanding mortgages.
#4 Private funding
Private funding applies to financing that does not come from an institutional lender or bank. Instead, money is exchanged between the investor and borrower based on their relationship. Sometimes, money lenders will be companies like private equity funds, relying on the resources pooled from multiple investors to back different projects.
However, it is also possible that the lender could be a family member or friend. You can use private funding to finance long-term rental property loans or rehabilitation loans if you intend to fix and flip. You may also use it to get a private lending bridge loan for new constructions.
It is important not to confuse private money lending with hard money lending. Unlike conventional lenders, hard money lenders usually follow specific criteria for loan approvals. In contrast, private money lenders set terms on a case-by-case basis.
The most significant benefit of private funding is that it is more flexible than traditional loans. Individual investors will willingly consider borrowers who have been denied conventional financing. For example, private funders may have no problems backing candidates with poor credit scores, provided that they have good property investment experience.
There are risks, however. The biggest drawback to this approach is that private money loans have remarkably high interest rates.
How to find investors
You’ll need to cultivate relationships with investors if you want private funding. A great way to start is by looking for possibilities within your existing network of friends, family, and acquaintances. We just published a great video on how to find investors through LinkedIn. It has some great tips on raising investor capital and brand building.
#5 Home equity
You may use your home’s equity through arrangements like a home equity loan. In many cases, this will let you borrow up to 80% of a property’s value so you can purchase another property.
Equity financing has its benefits and downsides, like all the options we’ve discussed.
Benefits
Lenders spend less time and effort on equity loans than on first mortgages, so they come with lower fees and closing costs. These loans also have below-average interest rates since they are secured by reliable collateral (real estate).
Drawbacks
The drawbacks are that (a) property values aren’t guaranteed to increase with time, so you may not make money from your efforts.
If the markets decline, you may be overwhelmed by the financial obligations of having multiple mortgages.
Conclusion
We’ve discussed some of the most common real estate financing options available. Hopefully, you’ve found the ideal approach for your situation.
If you still have questions, there’s good news! Our property investing courses include comprehensive training and guidance on property investment financing. So, you’ll have answers to all your concerns once you sign up.
