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As a beginner investor, understanding how to finance a real estate deal is just as important as finding one. A lack of real estate financing continues to hinder the majority of new investors in today’s market, simply because they are not aware of the different financing avenues. Whether you have access to working capital or not, there are always ways to acquire capital.
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Investing in real estate is never a bad idea. It offers potential investors a slew of financial and personal benefits, such as increased cash flow, home appreciation, and tax benefits. In fact, real estate investment continues to be one of the most popular vehicles in producing financial wealth. According to the IRS, approximately 71 percent of Americans that declared more than a million dollars on their income tax returns in the last 50 years were in real estate. Ironically, beginner investors face the challenge of learning how to obtain real estate investment financing before they can start creating wealth. Read on to learn about some of the most common types of real estate financing options out there, as well as prominent loans for real estate investing.
What Is Real Estate Financing?
Real estate financing is generally used to describe an investor’s method of securing funds for an impending deal. As its name suggests, this method will have investors secure capital from an outside source to buy and renovate a property. Not unlike traditional financing, however, real estate finance comes complete with terms and underwriting, not the least of which need to be fully understood before entering into a contract.
How To Obtain Real Estate Investment Financing
One of the biggest misconceptions of real estate investing is that you need to have a lot of money to get started, which isn’t true. However, the secret that many professionals don’t understand is that many different real estate financing options are available to fund every investment. Understanding the financing aspect is imperative because the method in which a specific deal is funded can greatly impact its outcome.
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As an investor, there are a few different ways to go about financing real estate investments. Each one will have its own set of pros and cons, and your financing approach will depend on the property and the situation. Beginner investors need to remember that not all real estate investment financing options are created equal. What works for someone else may not necessarily work for you, but the trick is understanding which real estate financing option will compliment your business strategy. By taking the time to research the various real estate financing options out there, new investors are sure to realize how accessible investing can be. Broadening one’s toolkit of real estate investment financing options is simply a matter of being knowledgeable about what strategies exist, as well as proper ways to leverage them. Keep in mind that all investors have faced the financing hurdle at some point in their career; when in doubt, there is nothing wrong with tapping into your investor network and ask for advice.
Real Estate Financing Options
Investors with a deal lined up have already accomplished one of the most important steps in home flipping. However, finding a viable deal is only one piece of the puzzle. Once you find a good property to invest in, you need to finance the impending transaction then.
Financing a real estate deal tends to send new investors into a fit of anxiety or is even enough to compel them to pack up their dreams and retreat to their nine-to-five job. However, if an investor commits to doing his or her due diligence, the fear of a lack of funds is irrational.
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If you have a great deal on the table, there is no limit when it comes to ways to fund it. A great example would be leveraging a self directed IRA, which would require some careful consideration beforehand; however, it goes to show that there are many available options for real estate investment financing. Experts at Loan Advisor suggest “Financing not only provides flexibility but also improves cash flow. There is fluidity in repayment and it provides options for collateral. I would suggest new real investor financing through hard money loans, hybrid loans, asset-based mortgages, and an FHA loan”. For investors wondering how to finance an investment property, I’ll explain some of your real estate finance options:
Cash Financing: Great for investors who have access to a significant amount of capital, either personally or through their network, and wish to purchase properties free and clear.
Hard Money Lenders: Accessible to investors who have less-than-perfect credit or financial history, and are in need of a short-term loan.
Private Money Lenders: Investors who are well-connected can often tap into capital from personal connections, borrowing money at a specified interest rate and payback period.
Self Directed IRA Accounts: Individuals who have elected to create savings through a self-directed IRA may make the decision to tap into their account as a way to access capital.
Seller Financing: Buyers and sellers can sometimes strike up a mutually beneficial agreement, allowing the investor and seller to avoid having to go through a private lender altogether.
Peer-To-Peer Lending: This is a great option for investors trying to raise the last portion of funding for a project. Peer-to-peer lending can offer high flexibility and low interest rates.
