Real estate is all about equity! Building equity in a property may seem easy in theory but hard to attain in reality. Those lucky few who are able to finance investment properties out-of-pocket can build equity fast. However, for the majority of home-buyers and real estate investors, that’s not the case. Most real estate investors would have to go through lenders, mortgages, and even family financing to secure enough cash for their investment properties. At the same time, both novice and expert real estate investors need the knowledge of real estate financing methods in order to excel in the field.
It’s widely known that real estate investors make their profit when buying a property. Therefore, financing is crucial to your success in the real estate investment world. Investors must keep an open mind when it comes to financing. For instance, an investor looking to finance a rental property is going to be different from another trying to finance a house-flip and so forth.
Real estate investors must research each financing method to grasp the ups and downs of each one. This is crucially important to determine the eligibility of the financing stream related to the type of investment strategy.
What are the most popular real estate financing methods?
Out-of-pocket cash
It only makes sense that cash takes the spotlight. It is the easiest and fastest method of financing any type of property. Many investors, both in real estate and other investment fields, advise refraining from mortgages and loans by any means possible. With ready cash, you can purchase an investment property and negotiate the price to increase your profits.
That being said, 24% of US investors use their own cash to finance investment properties. As a consequence, these investors benefit from escaping mortgage payments and interest rates!
Related: Cash Investment vs Mortgage Investment – Pros and Cons.
Partnerships
Real estate investing is a versatile world. What one can do, two can do even better! Creating partnership agreements for the purpose of real estate investing can be beneficial as it brings two people together. It’s one of the widely-popular financing methods that can boost the situation of any potential investor. If you don’t have the cash or the resources to start investing in real estate, create a partnership!
Related: How to Start a Real Estate Business Through a Partnership.
Above all, each partner will have a determined percentage of purchased investment property and a percentage of the profits. While it may seem excessive for some real estate investors to create a partnership agreement with a family member, it’s an inevitable must. It’s recommended to sign a partnership agreement to ensure each knows his/her rights and duties and avoid any type of hyperbole.
Hard money loans
What makes hard money loans one of the popular real estate financing methods is the fact that they are backed by the property’s value, not credit. Accordingly, hard money lenders charge more interest rates than other types of real estate financing methods. Typically, hard money lenders are used for short-term investing or financing, such as fix-and-flips.
Mortgages
Mortgages remain the classic among other real estate financing methods. When it comes to investment property financing, your usual mortgage requirements will change. The minimum down payment is significantly higher than owner-occupant properties. The typical down payment for an investment property starts at 20% or higher!
While a typical mortgage will suffice to grow an investment portfolio up to a few properties, real estate investors cannot go large scale through typical mortgages. Note that this type of financing has interest rates that can accumulate to reach a large sum that cuts your profits significantly.
Related: What Investment Property Mortgage Rates Can You Expect in the US Real Estate Market 2018?
Seller financing
Seller financing is among the real estate financing methods that have lost popularity. To clarify, the seller of the real estate property can act as a lender for the real estate property. This happens by providing the buyer with a specific payment plan. In return, the property buyer or real estate investor will make monthly payments to the seller until the price of the property is covered.
Seller financing can be a lucrative opportunity for the seller as he/she can charge more for his/her property with an interest fee for the financing.
Home equity loans
While this type of real estate financing methods may not work for everyone, it’s a great way to utilize any equity you already have in another property. A home equity line of credit can be utilized to take equity from a property you already own to purchase a new property. The beauty of buying an investment property using this financing method is the ability to replicate it almost endlessly. Real estate investors can let their investment properties pay for their own costs!
Related: What Is Equity in Real Estate?
Along with each of the real estate financing methods comes different scales to measure the success of an investment. Whether you’re paying in cash or with a conventional loan or even with a hard money loan, each will have different measurable metrics. These real estate metrics can determine the profitability of your investment. Therefore, investment property analytics, such as the Cap Rate and Cash on Cash Return, differ with each investment financing method. It’s important to utilize an investment property calculator to help guide you to a successful real estate investment.
To learn more about our investment property calculator, click here.
Related: Using Mashvisor’s Investment Property Calculator to Estimate Rate of Return.
Final words
Financing real estate investments may not be the most exciting part of real estate investing. However, it holds great value in the hands of the right real estate investor. Meanwhile, failing to pair the right real estate investment strategies with the right real estate financing methods can lead to loss. Furthermore, novice real estate investors must carefully watch their steps with their first few investment properties. In return, this ensures that they are able to create a solid and diversified real estate investment portfolio. If you have any more insights on the topic, don’t hesitate to share them in the comments section below!