Real Estate Investment Financing
So you’ve made the calls, you’ve headed out to look at properties and braved the elements in search of the deal and now you’ve found it. The next step is to determine which method of real estate investment financing you will use.
The quick answer is: “It depends”.
Depends on whether you want to hold onto the property or resell it quickly. Depends on how much money you are putting into the deal and how your credit ranks.
Depends on whether you want payments or do you want to pay cash. Should you use your cash or someone else’s cash?
Real estate investment financing basically comes in three
forms:
Bank
Financing
If you have the credit and the necessary down payment, you can get a loan from a bank or mortgage broker.
When going this route it is important to make sure you factor in monthly costs such as taxes and insurance and make sure your budget or rental income will cover the debt service.
If you’re buying rehab-grade property, the bank might get picky, since the property will be their collateral after all. Most banks prefer "pretty" houses.
(Make sure to check out the Investment Calculator below)
Cash
Cash is King when buying properties below market value.
The ability to act quickly and not wait for bank approvals is usually the key to acquiring distressed property or other-wise “deals banks to want to touch".
If you don’t have your own cash for the deal, you can use a hard money lender. Hard money lenders have different rates and fees. Most will charge double the interest rate a bank would, plus extra points for funding the deal.
Many are established real estate investors that have branched out and will understand the process and want to make sure you’re buying the property at 65-70% of the After Repair Value at the most.
Another route is to find your own private investors to put up the cash and split the profits on the back end.
Creative Deals
Many real estate investors specialize in buying homes with little or no money down. They achieve it through a variety of ways that fall under the umbrella of “Creative Deals”.
Creative Deals are usually situations in which the owners are in distress due to foreclosure, bankruptcy, divorce, or any other situation that creates urgency to sell quickly.
Methods include the Lease-Option, in which you lease the property with the option to buy later. You can assume the existing mortgage. In some situations the property can simply quitclaim the deed to you in exchange for dealing the property. Any of these methods can allow you to gain control of the property so you can then apply your strategy for the property whether it be renting it out or selling it.
With creative deals make sure you have a good real estate attorney on your side making sure your doing everything legally and that all parties are well informed of their rights. You'll be surprised how many real estate attorneys know very little about how to put together a creative deal.
