Wouldn’t it be great if you could passively build wealth using borrowed money? Oh wait, you can – it’s called real estate investing. And this is the asset class that has built more millionaires than any other wealth-building method out there.
Far more people build lasting wealth by investing in real estate than by starting high-tech companies, becoming actors or athletes, or winning the lottery. And while there are many reasons for this, one of the most important is leverage, aka funding.
Funding for real estate investors means that you can use other people’s money to acquire appreciating assets. The assets pay off the loans and put some passive income in your pocket as well. That is if you do it right.
What are the best financing options to obtain residential and commercial properties? Read on below to find out.
Conventional Loans
One of the best places to start when getting into real estate is with conventional mortgages. You can use the same mortgage that you used on your primary residence, but for a rental. And it can be either a single-family home or a two to four-unit property.
So long as you have money for the down payment, a good credit score, and stable employment history, conventional loans are some of the best you can get. They are easy to qualify for and you get some of the best interest rates on the market, which is perfect for those looking to hold long-term rentals.
When using a conventional mortgage for a rental property, you can expect some stricter requirements, however. First off, expect to pay 20% to 25% down.
Some conventional mortgages that you can use on your primary residence will allow you to put as little as 5% to 10% down, but not with a rental.
You will also need to have cash reserves on hand. Typically, this means having six months’ worth of property expenses stored in a savings account. This is to cover your payments if the property is vacant and not earning income.
FHA and Househacking
Are you struggling to save up money for a traditional down payment? If so, you aren’t alone. There are still ways for you to start investing. One of these low-down payment strategies is called house-hacking, though it’s best used when you’re young and flexible with your living situation.
House hacking just means that you buy a multi-unit property. But you live in one unit while renting out the others. So it could be a duplex, with two units, or a quad-plex with four units.
House hacking is a great option for people strapped for cash because of the low-down-payment loan options that are available. When you live in the property, you qualify for a homeowner mortgage as opposed to an investor mortgage. This is the case even when you have one or more units rented out.
The FHA home loan program lets you put down as little as 3.5%, so long as you will be living on the property.
So instead of putting $60,000 down on a $300,000 house, you can put down as little as $10,500. This is much more doable, even for people who don’t make much money.
When you’re ready to move out, you can buy a new primary residence, rent out the remaining unit, and have a fully rented property.
Private Funding for Real Estate Investors
Can’t qualify for a bank loan? Or do you have too many bank loans out there, and can’t obtain another one?
It might be time to turn towards private money. Private equity normally comes from family or friends who have cash available, and are looking for a decent return on their money.
By investing in a private real estate deal, they may be able to make more than they can by buying other safe assets like bonds or blue-chip stocks. Usually, in these types of deals, the private lender acts as the bank. You simply make mortgage payments with interest to them, and they don’t own the property unless you default on the loan.
Hard Money Lenders
Are you looking for financing for short-term flips? If so, hard money lenders may be a good option.
Hard money loans are short-term loans with higher interest rates. They are intended for purchasing and remodeling properties and selling them for profit within a few months. Due to high-interest rates, they aren’t suitable for long-term rentals, unless you plan to refinance in a year.
Apartment Loans
Looking to go big by multiplying the number of cash-flowing units under one roof? The ultimate strategy for scalability in the real estate industry is commercial real estate investments.
But these properties require a completely different financing strategy. You’ll need to get apartment-specific loans since you’ll be looking to borrow a lot more money.
The most popular are government-backed apartment loans. These are guaranteed by either Freddie Mac, Fannie Mae, or FHA. Down payment requirements are typically 20%, though the FHA apartment loan may require only 13% down.
When you start looking for apartments, make sure to check out Victory Real Estate. They are the leader in apartment investing on the East Coast and make property management not only easy but very profitable for you.
Partnership
Maybe you don’t know anyone personally who has the cash to help you fund a deal. But you can mean other investors who are looking for partnerships. By partnering with another investor, they supply the cash, you find and manage the deal, and you share profits and ownership.
And if you do good on the first deal, there may be a steady stream of cash heading your way to fund future deals.
Home Equity
One of the biggest hurdles for new real estate investors is saving up enough money for a down payment. Most of the time they need at least 20% down.
Unless they have high levels of income or save for a few years, it can be near impossible to get this money. But if you own your current residence, you may be able to tap into home equity.
You can either perform a cash-out refinance, get a home equity loan, or a home equity line of credit (HELOC). When you use home equity, it’s secured against your property. So interest rates are low.
That money can earn a much higher return if it is used to acquire a rental property.
The First Deal Is the Hardest
Funding for real estate investors is widely available. While it might seem difficult as a newbie, it gets easier with time. With experience, and ideally some equity under your belt, the second, third, and fourth deals you do should be much easier than the first.
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