Even the most casual investors know that real estate is one of the safest and most reliable investments. But as the old saying goes, “It takes money to make money,” and investing in real estate has a high barrier of entry compared to other forms of investing.
This doesn’t mean investment real estate is totally inaccessible, or that there aren’t ways to make real estate transactions work, if you aren’t already an established investor with deep pockets.
Here are a few ways investors finance real estate investments without millions of dollars in cash.
Most people know about mortgages, but many incorrectly think that traditional mortgages can only be used to finance a personal residence. Actually, you can also get a mortgage to finance investment properties.
Just like getting a mortgage for a personal residence, you need to have money on hand for the down payment and closing costs before a lender will approve your application. To qualify, you will also need a good FICO score, and documentation regarding your income and outstanding debts, and meet other financial guidelines.
As a result, it’s helpful to coordinate with a mortgage originator before buying an investment property, to be pre-approved for a mortgage and avoid surprises.
#2 Portfolio Loan
Portfolio lenders offer more specialized loan packages with different income, debt, and credit requirements than traditional mortgage lenders, because they do not sell the mortgages to larger institutions. Rather, they keep the mortgages in-house for the term of the loan.
Portfolio lenders tend to be local financial institutions loaning their own money, so they do not have to meet Fannie Mae lending guidelines. This allows portfolio lenders to be more flexible. But, they typically do not offer the same longer-term loans as traditional residential mortgage lenders.
#3 Hard Money Loan
Hard money loans are given by professional lenders. The loans are backed by the value of the property, not the credit worthiness of the borrower. As a result, hard money loans have lower loan-to-value ratios than traditional loans, and typically have a higher interest rate than most other forms of financing. Therefore, they are called “loans of last resort.”
Hard money loans are usually used short term by investors, perhaps while rehabbing an investment property or securing longer term financing. Though the interest rate is higher than other types of financing, it allows investors to purchase investment property, rehab it quickly, and make a profit.
#4 Private Money Loan
Private money loans are very similar to hard money loans, and the terms are often used synonymously. The difference is that private money loans are typically from people who personally know the investor, rather than professional lenders.
Relatives, friends, co-workers, and networking contacts are examples of people who could provide a private money loan.
Because private money loans are more informal than other forms of financing, and can be from people who have a vested interest in the investor (such as parents), the interest rates and terms of repayment can be the most attractive form of financing investment properties.
Crowdfunding is used to pool funds from many investors for large real estate projects. This gives small investors, who are perhaps only able to invest a few hundred dollars, to participate in profitable real estate projects.
Graystone Investment Group
Graystone wholesales properties in the Greater Tampa Bay market, and helps investors purchase and rehab real estate investment properties with all forms of financing.
In addition to finding investment properties that we resell to investors at discount prices, we also connecting our clients with private financing, while coordinating with rehab and management companies at no extra charge.