Want to start investing in real estate? One problem, you don’t know how to fund your real estate investment. Funding your real estate investment can be challenging, especially if you are new to the game. How do you eat an elephant? One bite at a time. No need to worry yourself so much that you immediately begin to doubt if you can do it. In this blog post, I’m going to break down some of the most common funding options and where you can find it. Some of these you might already have and just don’t know it. There are many sources of funding out there and what you don’t know, well you never knew about it. Until now that is.
- Savings – the obvious is money you’ve already got saved up in your bank or under your mattress. If you have enough to cashout the property then this is the quickest and easiest route. If not you’ll have to have enough cash to serve as a down payment and loan the rest of the money. This is the preferred route by many investors, as you leverage the bank’s money to help work for you. Next up are a couple of loans that you can utilize.
- Conventional loan – If you have a good credit score, you can apply for a conventional bank loan to purchase your real estate investment property. Utilizing a conventional loan to purchase a single-family purchase requires a 15% down payment. If you purchase a 2-4 unit property as an investment, then you will be required to put down a 25% down payment. If you intend to occupy the duplex for at least 1 year, then you would only need to pay 25%.
- FHA loan – If you’re unable to qualify for a conventional loan, you may be able to get an FHA loan. An FHA loan only requires a 3.5% down payment on a 1-4 unit property. However, you must owner occupy the property. This is only required for a minimum of one year. With the low down payment requirement, an FHA loan is one of the most popular strategies to get started.
- Hard money lenders – these are private money lenders who lend on a short-term basis for 6-18 months. They can close quickly within 2-4 weeks, sometimes even faster. They have very few contingency requirements needed. Cons are that they are very expensive, usually around 12-15% interest rates and they can charge upfront loan origination fees of 3-5 points, which means 3-5% of the purchase price. The pros are that they will lend money to you more based on the quality of your deal and not so much on your personal credit. They will also fund your rehab budget if you need it. You should only use this option if you have a clear exit strategy and a high return on investment.
- Non-QM loans – unlike conventional and FHA loans which are watched over by federal regulations. There are non-QM or non-conventional loans that are provided by wealthy private individuals. They lend their money to you to help you purchase properties. Pros are that they are typically 30-year fixed loans and for the most part they only care about your personal income and credit score. Cons are that the rates and fees are almost too hard money lender rates, but not quite there. These types of loans can be very useful for those who are self-employed or investors who have capped out on conventional loans.
- Other sources of funding: If you have any of the following types of accounts, you can check with your servicer if they allow you to withdraw funds or take a loan against them. Some things you might already own and not know that you have access to the money sitting there are 401K, a life insurance policy with cash value, stocks, cars, and other collectibles/valuables.
- Creative financing: seller finance is a possibility if it is the right seller and their situation would suit. Seller financing or owner financing to fund your investment property. This is when the seller of the property agrees to lend you the money for the purchase, either partially or fully, in exchange for monthly payments and interest. This can be a win-win situation for both parties, as you can avoid dealing with banks or lenders and negotiate flexible terms and rates, while the seller can generate passive income and defer taxes on the sale. However, you also need to be careful when using this option and make sure that you have a legal contract that protects your rights and interests.
- Partnership – if you don’t have the money, but you have the hustle and or the knowledge. You can find the deal and then source one or more money partners. Of course, choose your partner wisely. It is like a marriage and can either be great or end in a nasty divorce.
As you can see, there are many ways to find funding for your real estate investment property, each with its own pros and cons. You need to do your research and due diligence before choosing the best option for your situation and goals. You also need to have a solid business plan and a realistic budget that accounts for all the costs and risks involved in the investment. By doing so, you can increase your chances of success and profitability in the real estate market. If you have any questions or comments leave them down below.