How to finance real estate investments

How to finance real estate investments

Roger Pettingell Sarasota Real Estate

If you are looking to invest in real estate, there are 4 main financing options available: borrow from banks, pay in cash, a private loan or a hard money loan.

If you’re interested in investing in real estate, take a look at these four options for financing which could help your real estate dreams come true:

  1. Use conventional bank financing

The most common form of financing a real estate investment is to borrow from a bank. The bank will calculate your personal loan amount and the interest rate on your loan based on information such as your credit history, business plan and current and predicted future finances. This tends to be one of the lowest interest rates available for a loan, however, it can be high risk. If your rental property is vacant for any length of time, it will quickly eat into your profits, and banks can take a long time to approve and distribute loans as they are significantly stricter than private lenders. There is also a limit on the number of conventional mortgages any one person can have open at any one time.

  1. Pay in Cash

The next option for financing your real estate property is to pay the full price with cash. The main drawback to this option, of course, is that you have to have the full amount of cash available to do this. The benefits to paying in cash are that your opportunities to purchase real estate are significantly improved as there is no question of financial doubts for the seller. This can also be a method that leads to significant discounts, given the convenience of the transaction. Buying in cash also means that buyers are avoiding the massive added expense of the interest that comes with most loans.

The drawbacks of cash payments come with the risk versus reward. Although paying in cash is safer, it means that you have a cap on your potential gains. Choosing to buy with a loan or a mortgage can actually lead to greater profits from renting your property out, something that can be particularly useful if you are buying a flat to rent or even planning to invest in a multifamily property.

Although paying with cash can provide the buyer with greater stability and security, removing the risks associated with lending can reduce your potential profits.

  1. Borrow from a private lender

Making use of a private individual lender (that is, a lender who operates without any financial institutions) is another way that you can finance a real estate investment. These lenders tend to make a profit by lending money to anyone they feel will increase the value of their investments. The benefits to this can include an increase in flexibility compared to traditional institutions in terms of both who they will lend to and the speed at which funds will be available.

A private lender can be a great option if you are unable to get a typical mortgage, for example, if you have bad credit. However, it is worth noting that the interest rates offered by private lenders can be significantly higher than what would be offered by a bank.

  1. Take out a hard money loan

Some buyers will take out a hard money loan with private lenders. This type of loan relies on a hard asset, so in terms of real estate, the property. This loan is ideal for a short-term loan, for example, if you are flipping a home. A hard money loan can be beneficial as the finances can be approved in as little as one week and with little upfront cost, which means investors can move quickly. The drawbacks come with the interest rates, however. Hard money loans tend to have interest rates which are significantly higher than that of a traditional mortgage, and therefore means you have to know what you’re doing. There will often be a time limit on these repayments, which if not met could result in higher rates or even in the buyer walking away with nothing.

Which option is right for me?

Depending on your own individual financial citation as well as your plans for the property, different methods of financing may work better for you, so think carefully about your plans, your finances and where you expect to be financially in the future so that you can make the best decision for you.

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