There are a lot of questions that come to mind when someone is thinking about investing in a real estate property. How much money do you need? What kind of financing options do you have access to? And, once you have the property, how do you manage the finances?
Even though it seems frightening, once you learn the basics, you’ll realize that the process is simple if you follow several rules and implement the right technique. In the following article, we’re sharing four ways of financing a real estate investment property, so dive right in.
Consider Bank Loans
Different types of bank loans for real estate investing are available, depending on the purpose of the investment and the financial situation of the borrower. The most used type of loan is a mortgage loan. Other commonly preferred types are construction loans and bridge loans.
Getting a bank loan for real estate investing can be a great way to finance the purchase of property or refinance an existing loan. If you consider getting one, you need to shop around for the best offer possible, but you should also have a good credit score.
DSCR Loans
Debt service coverage ratio loans, also known as DSCR loans are loans available to many small businesses and real estate investors. This type of loan is designed to help borrowers qualify for a loan based on the cash flow from the investment property. Those loans are typically given by private lenders and represent an alternative to hard money loans mentioned below.
DSCR loans can be used to finance various property types, such as office spaces, hotels, and resorts.
Hard Money Loans
Hard money loans are a type of financing that is provided by private lenders rather than banks. They are mainly used for real estate investments as they can be approved quickly and are often based on the value of the property being purchased rather than the borrower’s credit score.
Hard money loans can be a good option for borrowers who may not qualify for traditional financing, but they typically come with higher interest rates and fees. Borrowers should do their research to make sure they are getting the best deal possible before taking out one.
For instance, if you consider flipping houses, buying them for less, renovating them inside-out, and then selling them for a better price, hard money loans will help you out. Make sure you calculate the right amount you’ll need for the process and add it to the final value of the new, improved house.
Private Money Loans
Private money loans are a type of loan that is given by a private individual or organization, as opposed to a traditional lender such as a bank. Private money loans can be used for a variety of purposes, including real estate investments, business ventures, and personal expenses.
The terms of private money loans can vary depending on the lender, but they typically have shorter terms and higher interest rates than traditional loans. Because of this, private money loans are often seen as a last resort for borrowers who cannot qualify for other types of financing.
Before you consider taking out private money loans, research the individual who is going to lend you the money, and always sign a contract that will state all the terms of the loan beforehand. That way, you’ll secure the loan and minimize the chances of being scammed.
Home Equity
If you’ve owned your home for a while, you may have built up a significant amount of equity. Home equity is the portion of your home’s value that you own outright, and it can be a valuable resource if you need to borrow money.
Most lenders can borrow around 80% of the home equity value and use it to purchase, improve, and repair the property. Using home equity for financing has both good and bad sides, depending on the type of equity.
With a Home Equity Line of Credit (HELOC), you’ll make interest-only payments, with variable rates, meaning they can change if there are changes in the prime rate. Cash-out loans, on the other hand, come with fixed rates, but they extend the duration of the mortgage, and in the long term, you may end up paying bigger rates for the original property.
Bottom Line
We presented you with the 5 most common ways of getting the budget to finance real investment property. They all have their pros and cons, and the final decision is up to you. Always make sure you shop around for the best offer, make sure everything is legal, and sign a legally-binding contract whenever possible, after carefully reading the terms and conditions.
