Types of Real Estate Investor Financing
Below are definitions for the most common types of financing available for real estate investment properties:
Bank Loans: Real estate investing bank loans typically have a duration of between 15 and 30 years for residential loans, or 10 to 15 years for commercial loans. You’ll need good credit (or know someone that does and will co-sign with you) and be able to show that you can repay the principal and interest to qualify for a bank loan.
Mortgages: Available in a variety of configurations, mortgages range from traditional FHA or VA loans to jumbo loans and ARMs (Adjustable Rate Mortgages).
Home Equity Line of Credit (HELOC): For those that have equity in a primary residence and good credit, the homeowner can typically open a home equity line of credit (better than a loan) against their home.
Personal Savings: Personal savings could be used as a down payment or to finance the entire purchase of a residential or commercial property, but we wouldn’t recommend it.
IRA / 401 K: It is currently possible to create a self-directed IRA and purchase property with your IRA funds. If you have a 401K through an employer or an old one to roll over, you can switch to a self-directed IRA to borrow against it to finance a real estate investment.
Other Real Estate Investors: Suppose you can find a great property, but don’t have the financial means to secure the deal (no down payment or ability to borrow). There are plenty of other investors to wholesale the deal to, or to partner on the purchase with you. The other investors could be your own family members, friends, or even investors in real estate investment MeetUps in your area.
Hard Money Lenders: Hard money lenders (either individuals and companies) lend money in real estate investing situations where banks and mortgage companies won’t. The downside is typically a shorter term on the loan (usually only 6-12 months for rehabs) and higher than average interest rates. Learn more >>
No Money Down Investing: No money down (zero down) investing can be possible through some loan programs, but more often is available through owner financing. A good, seasoned investor will typically start with an offer to buy property with owner financing as it benefits both the seller and buyer.
Private Investors/Lenders: Similar to hard money lending, private lending/financing typically comes from someone you know (maybe another investor) personally. Often times the loan is made from a self-directed IRA or 401k. Learn More >>
To determine what type of financing is best for your specific real estate investing deal, you’ll have to consider:
- the length of the loan and the carrying costs involved
- the monthly payment (principal, interest, taxes)
- the insurance you need to carry while the home is rehabbed
- the points to close the loan (each point is 1% of the amount of the loan)
- any other qualifying criteria
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