Financing real estate investments is a huge concern for beginner real estate investors. However, what they do not know is that financing an investment property is not that hard, actually.
The thing is, the first time you do it is a bit challenging as you need to know where to go to find financing. Once you learn that and do it for the first time, you will find that it is not as difficult as it seems.
Related: The Top 10 Advantages of Investing in Real Estate
Moreover, what you do not know is that you can actually go about buying a property with little or no money at all. So, let us dig into the many ways for financing real estate investments.
Financing real estate investments: All in cash
No matter what blogs or other sources you read on financing real estate investments, you will always find “all in cash” as your first option. Obviously, if you have the money, why not buying an investment property at once?! However, we must tell you that it is not advised as it affects your cash on cash return negatively. The more you put in cash, the less you get in cash on cash return. Therefore, you might want to use this money to buy multiple investment properties using one of the financing strategies we are going to talk about next.
Financing real estate investments: Borrow cash
The first thing you do when you need money is asking people you know to lend you that money. That is exactly what we mean by borrowing the cash. Ask your family, friends, colleagues, or even a fellow real estate investor if they have the money to lend you. Sign a payment agreement with them, and you are good to go!
Borrowing money from your family and friends is a form of private money lending. Private money is when you are borrowing from someone you are in some kind of relationship with. This form of borrowing does not come from professional lenders, nor does it require formalities like other forms of financing real estate investments.
Sometimes, it is better to get private money lending, especially for beginner real estate investors. Other forms of financing might be a bit too risky and formal for beginners. So, it makes it easier in case you get into a financial bind that you can always negotiate payment plans with people you already know.
Financing real estate investments: Mortgage
A mortgage is another way of financing real estate investments. You basically got to a bank or a mortgage broker and apply for a loan. However, you must know that if you turn to a mortgage broker, you are not dealing directly with the lender. A mortgage broker operates as a middleman. He/she essentially finds you the best mortgage deals, and you pay him/her a commission. So, keep that in mind as it is going to be part of your property expenses.
Another thing to take into consideration when applying for a mortgage is the down payment. Most lenders require a down payment of 20% of the total sum. S, if an investment property is worth $100,000, you should put down $20,000 in cash, and the lender will lend you the $80,000.
Related: Everything You Need to Know About Reverse Mortgage
Financing real estate investments: Hard money loans
Now, hard money lenders are the professionals in this case. They are professional lenders who lend you their own money. With that being said, you should expect a never-ending list of formalities, documentation, and guarantees. Moreover, you should expect short-term loans, which means your loan is going to be due up to 36 months only! However, the good part about hard money loans is that they provide you with the money within days of approving your application.
We strongly recommend that you do not use this financing method unless you are an experienced real estate investor. As a new real estate investor, you do not know yet how your business is going to perform. Therefore, it is hard to commit to a short-term loan. On the other hand, experienced real estate investors already know their businesses’ performance; therefore, they know if they are going to be able to pay the loan on due time.
Financing real estate investments: Partner up!
No matter where you search for financing real estate investments, you are always going to hear about real estate partnerships. In fact, co-investing in real estate might be the best option to go about buying a property with little or no money at all. You can find a business partner who is willing to give you the money in return for a profit percentage. Just make sure you have got some good deals to offer as well as a solid business plan with all the exit strategies required.
Related: How to Use a Real Estate Investment Partnership for Long-Distance Real Estate Investing?
Financing real estate investments: Owner-occupied loans
This financing real estate investments strategy is the best when it comes to residential real estate investing. Basically, you apply for a loan, and the lender will require that you live on that property for a while and then rent it out. It may sound inconvenient; however, if you are a beginner investor, this might actually be the best low-risk financing strategy. Once you have lived in the rental property and then rent it out, you can do the same thing over again to purchase more properties, and, therefore, grow your investment business.
Final thoughts
No matter what financing strategy you go with, it is important to consider two factors: referrals and financing terms. When looking for the best financing strategy, you should always ask people who have done it first. You might actually be able to skip all the searching. However, this does not mean that they will always have something that suits you. It is just a good idea to take others’ recommendations into consideration.
Another important thing to do is checking the lenders’ terms and conditions. This is crucial in order to make sure that you sign up for what you exactly wanted.
Finally, we recommend that you check out Mashvisor’s blogs on financing strategies as well as buying investment properties. We guarantee that you will find all that you need in just one place.