While investing in real estate is never a bad idea—it offers financial advantages like home appreciation and tax benefits—the thought of actually pursuing it may seem daunting, especially if you’re new to the world of real estate. As a beginner investor, understanding the different ways to finance a deal is just as important as securing one.
Things like the type of property you’re looking to invest in—and its condition—as well as the amount you need to borrow will all factor into which financing options will make the most sense for your goals. For instance, someone who is looking to invest in a multi-family property may consider different financing options from someone who is looking to invest in a fix and flip. Length of loan, interest rates, and application requisites can vary widely and not all options are created equal.
We would be remiss to not begin with the obvious and most common loan. Ideal for buy and hold investors who want to make a profit off of rental properties, these are the loans acquired through banks when an investor provides a down payment in exchange for a lien on the property secured by a mortgage. While borrowers taking on the loan for a primary residence can putdown as little as 5% of the purchase price, investors often commit as much as20%.
The process for obtaining this kind of loan can be tedious and lengthy, and because a bank is the lender, investors’ numbers are important. Credit score, history, and income all play a significant role in whether a loan application gets approved.
Because these mortgages are underwritten for a term of 15,20, or 30 years, they are not considered for any short-term financing, for example, fix and flip properties.
Private (or Hard) Money Lenders
Unlike traditional bank loans, private lenders are far more interested in an investor’s experience, collateral, and borrower’s performance rather than their credit score and income. They also approve loan requests far quicker than banks, often providing funds to investors within a week or two. For these reasons, private money lending is often a go-to option for investors looking to fix and flip properties.
Though private money lending may come with slightly higher interest rates in place—anywhere from nearly 8% to 10%—there is also the propensity for lenders to be more flexible with the terms of agreement. As shorter-term loans they are ideal for the fast nature of fix and flip properties.
It’s important to note that private lending can be structured differently to accommodate the investor’s needs. For buy and hold properties, for example, the loan is structured much like a traditional bank loan where the lender puts up the full amount for the purchase and rehabilitation of a property, and the buyer repays the loan at an agreed upon interest rate and schedule.
Loans for fix and flip properties can be negotiated to reflect a profit-sharing agreement where the lender loans the entire amount to the buyer and once the property is sold, the profits are split in accordance with the agreement.
Much like private money lending, seller financing is another practical option for fix and flip property investors. This option allows the investor and seller to strike an agreement that avoids going through a private lender altogether. In this arrangement, the buyer of a property will make payments directly to the seller, rather than go through a bank. While the seller is motivated to sell quickly and the buyer avoids traditional hassles like financial and credit score minimums, this agreement often leads to a faster transaction process with no closing fees or costs.
Friends and Family Investing
Unlike private money lending, this form of investment is relationship-based, stemming from an investor’s circle of connections—friends, family, and acquaintances. The bigger the “primary circle” an investor has—those friends and family with the means to provide loans—the bigger the“secondary circle”—or the connections those primary contacts have. Because of the personal nature between lenders and borrowers, loans are highly customizable and can range from long-term to short-term and can accommodate everything from fix and flip to buy and hold.
Peer-To-Peer (P2P) Lending
Sometimes called “social” or “crowd” lending, P2P lending connects people—or entities—able and willing to loan money with people or businesses that need to borrow. Unlike private or hard money lending, P2P lending is done through an online platform with a fairly traditional application process. Rates, terms, and qualifications are still heavily based on traditional factors like credit score, credit history, and income.
If you've reviewed the options available for you, and decide to look for a Private Money Lender, you can turn to Temple View for recommendations. We offer a wide range of Fix & Flip, Bridge and DSCR loan opportunities with great rates and low hassle. Contact us today to learn more.