You have found the perfect real estate investment property (REI), and now you want to choose from the many ways to finance your acquisition. But first, get your financial house in order and learn as much about real estate as you can. Now, there are 6 Types of Real Estate Investment Financing.
6 Types of Real Estate Investment Financing to Consider
- FHA Financing
One of the best ways to start is to buy a property with an FHA loan. You will need two years of employment history, and you can only use these loans on your primary residence. But the great part is that you can buy any property up to a fourplex. So why not live in one unit and rent out the other three? These loans come with great rates, and they will lend up to 96.5% of the property’s value. And for properties that need some work, you can take advantage of the 203K program they offer as well.
An FHA 203k loan, (sometimes called a Rehab Loan or FHA Construction loan addresses a common problem when buying a fixer home: lenders often don’t approve loans for homes in need of major repairs. The loan allows you to finance not one, but two major items 1) the house itself, and; 2) needed/wanted repairs. Because the lender tracks and verifies repairs, it is willing to approve a loan on a home it wouldn’t otherwise consider.
- Traditional Banks
For the most part, the banks that will be willing to lend to you on small investment properties are local community banks. You may have some luck with the larger, national variety, but they tend to shy away from these types of loans.
If you own your own home and have some equity, it may make sense to take out a Home Equity Line of Credit (HELOC) on the property in order to fund your investments. This is especially true if the property you want to buy needs some work, or you plan on flipping it. Using a HELOC prevents you with getting hit with a bunch of loan fees up front. And then, once you flip or refinance that investment property, you can pay down the HELOC and then use it again on your next property.
- Seller Financing, Subject To, and Lease Options
If you’re negotiating with a motivated seller, creative financing is definitely an option you should consider. Again, I will note that it’s very difficult to do even these types of deals if you don’t have any money of your own. For example, you might be able to buy a property with seller financing for 100% of the purchase price, but what if it needs some repairs? Generally, these should be seen as “low money down” not “no money down” deals unless you plan on wholesaling.
- Partnerships and Private Lending
Generally speaking, private loans will not be something you want to stay on your property for long because they are too expensive. Hard money loans will virtually always be too expensive. But even private loans (from individuals with money that you meet and convince to lend to you) will still generally be 8% or higher. That being said, if you are able to find a private lender who will lend to you for less than that, you could conceivably use that as a source of long term financing. Just be warned that private lenders will eventually want their money back, so you should have a plan in place for when that happens.
Another option is to use a partner. This could be your strategy in general, where you bring the time and effort, and your partner provides the money for the down payment. The partner can also help you by providing strong credit and income that will make a bank feel more comfortable lending. This doesn’t mean a bank will lend to you if your
credit is in the mid 300’s even if you have a financially strong partner, but it certainly will help if, on your own, you are on the edge.
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.
There are three primary types are
- donation-based – seeking money for a cause
- rewards-based – seeking money with some kind of reward attached.
- equity crowdfunding– seeking money from investors who expect an equity position in the project.
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