There are many different ways to finance a property. It’s important to get the right one for you because without the right financing your investment might soon be underwater.
“We’ve been taught to think of debt as a four-letter word, but it doesn’t have to be. Especially once you have the financial education to see how it can work for you instead of against you.” ~ Robert Kiyosaki, author of Rich Dad, Poor Dad.
As the quote above suggests, debt financing for real estate investment can make a lot of sense and really work for you.
When you get a loan from the bank, you can purchase a real estate investment property with only a small percentage out of pocket (usually from 3.5% to 20% down). You can then rent out that property and the tenant pays the cost of the debt while also putting money in your pocket.
It is important to learn about the different types of loans available - commercial or residential and how you can take advantage of these.
It is also helpful to learn about the different other creative ways you can get financing - from seller financing to gathering a group of investors together to purchase.
For example, as self-employed professionals, it was very difficult for my husband to get conventional loans. When we learned we weren’t limited to our own capital and credit and could bring groups of investors together to purchase larger properties, we were able to quantum leap. It’s this knowledge that allowed us to jump from 2 rental doors to over 1000 rental doors in less than one year!
Here are 6 sources of funding for your real estate investing:
A conventional loan from a bank is the most common type of mortgage. You provide a down payment and the bank gives you the rest of the money in exchange for a lien on the property secured by a mortgage. Banks normally offer lower interest rates than other lenders. Down payments are typically higher and the loan terms are longer. Conventional lenders can also be sources of business credit, which may also be used to fund real estate projects.
Hard money lenders are institutions that provide loans, secured by the hard asset (the property) to secure the loans. They provide short-term loans with higher interest rates than a bank. Hard money lenders typically fund much more quickly than banks and are more flexible with regards to the buyer. When it comes to hard money loans, the underlying property is more important than the buyers' credit or income.
Private money is money financed from individuals (rather than institutions). These individuals can be family, friends, co-workers, or other investors. As compared to conventional mortgages, private money loans will generally have higher interest rates, shorter lengths, and more flexible loan terms. This type of funding is generally more readily available and easier to obtain.
You can use your own or others' self-directed retirement accounts (SD-IRA or SD-401k) to invest in rental properties, rehabs, private equity, tax liens, or for private money lending to other investors. You can also take loans out from your 401k to fund your real estate investments.
Seller financing is when, instead of getting a loan from a bank, the buyer gets a loan from the seller for the purchase.
Seller financing is often structured like a traditional residential mortgage except the seller plays the role of “the bank” and receives monthly payments of interest and principal from the buyer along, in most cases, with some form of down payment. In the event that borrower fails to make the payments, the seller can foreclose and claim the collateral, usually the property on which the loan was made, much as the bank would have.
In the case of seller financing, the buyer and seller will execute a promissory note providing an interest rate, repayment schedule, and consequences of default. The buyer will send the monthly mortgage payments to the seller, until the loan is paid off.
Syndication is a great option that allows you to leverage other people’s money (OPM) and in some cases other people’s time (OPT) to acquire more property than you could by yourself.
Syndication can be used with any of the other three methods. You can use a syndication to purchase a property all cash, to purchase with lender financing, or to purchase with seller financing.
Within syndication there are two major roles: the active investor/sponsor/syndicator and the passive investor.