The real estate industry is one of the most lucrative sectors, given the ever-rising housing demands. It’s become a very common investment choice for many people, thanks to the various options of profit-generating activities. One can make money through appreciation, rental income, or business activities that are dependent on the property.
As an investor, you’ll enjoy a stable cash flow, passive income, leverage, diversification, and tax advantages. If you’re not ready to own a property of your own, you can opt for real estate investment trusts (REITs). (1)
Even with all these options, many people fail to reach their goals simply because they chose the wrong property financing option. This article aims to cover some of the best and most trusted ways to finance your investment.
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Pay in cash
The first and the most straightforward way of financing your real estate is by paying the full amount upfront. Like any other option that’ll be shared in this article, this has its pros and cons. The most obvious disadvantage is the fact that you’ll need to have the necessary financial resources to go ahead with the transaction. Unfortunately, not many people can afford to provide the full amount at once.
The advantage, however, is that you’ll save a lot of money that would have otherwise been used to cover the interest expenses associated with hard money loan requirements or conventional loans. You’re also likely to receive huge discounts on property sales in exchange for your convenient cash offer.
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Private individual lender
Perhaps the most popular alternative for those who can’t afford full payments upfront is an individual private lender. These are individuals who make profits by simply lending money to those real estate investors who increase their property value. They tend to be more flexible than institutions like banks.
For one, they’re willing to lend to almost anyone who’s looking to invest in real estate, provided they meet the minimum requirements. You’re also likely to get the loan within a short period of time. Therefore, you don’t have to go through all the hassles associated with banks and other big financial institutions. If, for one reason or another, your profile doesn’t allow you to apply for a mortgage, this might be the ideal option.
There is a catch, though! Loans taken from private lenders have higher interest rates than those you get at a bank. It can even be raised a lot higher if your credit score is low. All this is expected because the lender is taking quite a risk. Another disadvantage is that you might need to build a lender network to successfully fund your investment.
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Hard-money loans
As a first-time investor, if your credit score is poor, you might find it difficult to get loan approval. For that reason, you might want to consider hard-money loans as another way of financing your investment. A hard money loan simply refers to a loan that’s backed by the value of your physical assets, such as a building or a car. Most investors consider this a loan of ‘last resort’ and only apply for it when they no other viable option.
The advantage of hard money loans is the fact that it takes the value of your property into account, rather than your creditworthiness. As such, you can have a poor credit score but still manage to get a huge amount of money. As you’d expect, the lenders—either individual or companies—would raise their interest rates to compensate for the risks involved. (2)
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Conventional bank financing
Conventional loans are different from Hard Money Loans. Perhaps the most common form of real estate financing is conventional bank financing. Unlike hard-money loans, banks lend money to the borrower based on their creditworthiness. As such, the better your credit score, the higher your loan limit. This strategy enables the banks to reduce the risks involved in the transaction.
Apart from the credit score consideration, another disadvantage is the fact that the approval process can take a long time. It can also be quite frustrating, given how strict these institutions are when it comes to the borrowers’ profiles. On the brighter side, though, you get to enjoy lower interest rates than individual private lenders.
Conclusion
The real estate industry is one of the most lucrative sectors today, but it also requires a lot of money to start. Financing your investment can be quite tricky, especially if you’re a first-timer.
The good news, however, is that you can there is an option for everyone, regardless of your creditworthiness. If you don’t have all the money upfront, you can find an individual private lender or a company willing to offer you a hard-money loan. Conventional bank financing is another option and probably the best one for those whose credit score is good.
References
- “Key Reasons To Invest In Real Estate”, Source: https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp
- “Pros And Cons Of Hard Money Loans”, Source: https://www.thebalance.com/hard-money-basics-315413
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