Real estate investment loans can be a great way to increase your profitability when purchasing property for renovation and flipping, or building a rental portfolio.
Real estate investment loans offer many different options, so it is essential to understand your choices. Selecting the right one for your individual situation can help maximize your investment potential and accelerate progress toward reaching your objectives.
1. Conventional Bank Loans
Conventional bank loans are a popular source of financing for real estate investment projects. These loans can be obtained from both small, local banks and national financial institutions alike.
Customizable loans are offered based on loan amount and borrower profile. Depending on whether they adhere to guidelines set by Fannie Mae (Fannie Mae) and Freddie Mac (FHLC), they may be classified as conforming or nonconforming loans.
Loans such as these are often sought by real estate investors, house flippers, developers, rehabbers and speculators who require fast financing to secure investment deals. Lenders focus on the value of an asset or property rather than on personal finances history which leads to faster approval and closing times.
2. Hard Money Loans
Hard money loans are a type of financing provided by private lenders rather than banks, typically used for real estate investments and approved quickly.
They are also based on the value of the property rather than a borrower’s credit score, making them ideal for investors looking to purchase fix and flip or home rehab projects.
However, they can be expensive. Typically, they feature high interest rates and fees, necessitating borrowers to put down a substantial down payment.
Hard money loans are commonly used to fund properties that need repairs. These can include fix-and-flips, home remodels, and bridge loans.
3. Home Equity Loans
Home equity loans provide you with access to money you’ve built up in your home, which can be used for various things like renovations, debt consolidation and even purchasing another property.
Home equity loans have several advantages, but also some drawbacks. For instance, they often carry higher interest rates than credit cards or personal loans.
Furthermore, mortgage loans often include closing costs and additional fees that accumulate over time and could significantly damage your finances.
Based on your financial situation and the investment project you have in mind, you may want to explore other financing options before applying for a home equity loan. Hard money loans and private lenders are two such alternatives that investors who don’t qualify for traditional bank loans or other types of real estate investment loans may want to explore; however, these will typically come with high interest rates and be harder to get approved for.
4. Private Lenders
Real estate investors looking to purchase investment properties but unable to obtain conventional loans may find relief through private lenders. They provide flexible terms and speedy funding.
Private lenders differ from banks and other financial institutions in that they don’t have to adhere to the same regulations as traditional lenders. This gives them more freedom and allows them to customize loans according to specific projects, offering a more personalized touch.
Hard money private lenders lend based on the value of real estate assets, not credit scores. These loans are short-term and can be utilized for construction or renovation projects.
Bridge loans can be an attractive option for homeowners struggling to sell their current home, or who want to use the equity they built up in it to buy a new one. They typically last six months to one year and aren’t offered by institutional lenders; additionally, these loans tend to be more costly than conventional bank loans with interest rates ranging from 1-3% of the total mortgage amount.
