There are many sources of funding available to use as real estate investors. It is important to know the different financing options to structure your real estate investment activity. As you will see in this report, private loans have several advantages over other sources.
Mortgages – Mortgages are the traditional type of financing for real estate investments and are usually provided by banks, mortgage companies and savings and loan companies. Mortgages typically last 15 to 30 years with interest rates in the range of 6% to 8% depending on your credit score and history. Mortgages require you to go through a qualification process and involve a lot of paperwork and can take weeks or even months to finalize.
Mortgages have several major weaknesses, including a 20-30% down payment, a credit score of 700 or higher, and strict limits on the number of loans a person can make. In fact, down payment requirements for investors have increased by up to 40% in some cases. Banks and other finance organizations are also seriously cracking down on credit ratings and generally require ratings above 700, whereas just a year ago they were leading with a rating of 600 or less from a real estate investor.
Mortgage lenders will only let you acquire a certain number of properties before cutting you off from further financing. Fannie Mae and Freddie Mac, who really control the US mortgage market, recently imposed new lending restrictions and now only allow a maximum of 4 loans per investor.
Mortgage lenders are also very reluctant to provide loans to LLCs or corporations and usually require you to personally sign the loan. This negates many of the advantages of LLCs or corporations in terms of asset protection and limitation of liability.
hard money – Hard money loans are also called rehabilitation financing. Hard money loans tend to have very short terms of 6-12 months and hard money lenders expect you to pay them back after 12 months with a new mortgage. These types of loans tend to have very high interest charges that sometimes exceed 20% with very high upfront and repayment fees. On the positive side, hard money loans generally require less qualification from the investor due to very low LTV ratios.
Creative financing – Creative financing is an umbrella term for techniques such as lease options, contingent and owner financing that will allow you to gain control of a property without a down payment. These techniques are great when you can use them, but don’t apply when the seller needs to sell cash.
Sources of revolving credit – Sources of revolving credit include commercial lines of credit and credit cards. While these can be flexible sources of finance, interest rates tend to be high and require high monthly payments. They also limit you to the size of your available line of credit.
Private lenders – Private lenders are individuals who have money to lend for investment purposes. They may or may not be wealthy, but they have excess cash or assets beyond what they need to live. These people are willing to lend for a higher return than they can get with bank CDs or money markets. There is no limit to the number of private lenders you can have or the number of real estate transactions you can do with private money.
Private lenders are looking for returns of between 9% and 15% and secured by local rental properties. This type of return will provide investors with a positive return on investment of almost 300% in CDs and money markets. The result is a perfect combination of private lenders looking for better returns on their money and secured by property and real estate investors looking for cash to fund transactions and the ability to pay higher returns.