Real estate financing is the process of raising capital to purchase, renovate and resell a property for profit. While this step can often be one of the most intimidating in home flipping, it doesn’t need to be.
No matter your level of experience as an investor, there are numerous ways to secure funding for your next property purchase. The key to maximizing your return on investment is keeping an open mind about all possible solutions.
Types of Financing
Financing real estate can be done in several ways. No matter if you are an experienced investor or just starting out, knowing the available financing options is critical for success.
One option is a conventional mortgage loan, which are offered by banks and credit unions. These loans can be structured as fixed-rate or adjustable-rate loans depending on your preferences.
A conventional mortgage requires a down payment and is secured by the property. It’s also known as a conforming mortgage due to its compliance with Fannie Mae and Freddie Mac lending standards.
Government-backed real estate loans (FHA, VA and USDA) provide another financing option for purchasing a home or investment property. These loans typically apply to those who plan to live in the home rather than renting it out.
These mortgages may offer greater flexibility in down payment amounts and qualifying criteria than traditional loans, but they often carry higher interest rates and fees.
Mortgage Loans
Mortgage loans are a commonly used form of real estate financing and an integral component for most borrowers during the home-buying process. They allow you to borrow large sums of money (usually hundreds of thousands) at low interest rates that will be paid back over an extended period.
Mortgages come in many forms and some are better suited to certain properties than others. Residential mortgages, which are used for home purchases, and commercial mortgages that support the acquisition or refinancing of real estate used for business operations can be tailored to fit each individual’s needs.
Mortgages have the distinct advantage of being secured by property, meaning if you fail to make payments on your loan, the lender has the legal right to take possession – through foreclosure if necessary – in order to recoup what is owed.
Hard Money Loans
Hard money loans are a popular way for real estate investors, house flippers and developers to access fast financing without the lengthy approval process required by traditional lending institutions.
These loans are secured by a property and serve as collateral. Typically, they’re utilized for rehabbing distressed properties and purchasing buy-and-hold investment rental properties.
Even those with poor credit or no credit history can secure a hard money loan. However, the interest rates from traditional commercial lenders may be higher than those offered to those with better financial standing.
Furthermore, these lenders typically require a down payment and additional fees that range from 1% to 3%. Origination fees and lender charges can also be assessed.
These loans tend to be short-term, so if you fail to make payments as agreed, the lender has the right to seize and sell your property at their discretion. In other words, you could potentially lose all of your investment property if you default on payments.
Equity Financing
Equity financing is a popular method for business owners to raise capital. This type of arrangement usually entails selling some portion of your company’s ownership to investors.
Small companies new to the real estate industry or those unable to secure large bank loans may find this funding source beneficial. You can use it for business expansion, acquisitions, or other costs associated with running a successful enterprise.
For instance, equity finance may be necessary for a commercial property development project. This type of funding typically works alongside a mortgage loan.
Equity financing investors offer businesses invaluable expertise and the capacity to navigate financial obstacles that your business may face. Furthermore, they provide invaluable advice, mentoring and connections in order to aid in the success of your venture.
