Real estate has always been a solid investment, but how do you go about financing real estate? Let’s look over the basics of what you need to know, how to find the financing and some issues that could arise when you are financing real estate.
5 Things to Know about Financing Real Estate
1. Is it Right for You?
The first thing you need to know about financing real estate is if it is right for you. If you are buying your first investment property, you should assess your situation. Do you work full time and rely on your paycheck for support? Are you paying off credit cards or any other debt you should focus on first? Are you able to make simple repairs to a home?
2. Interest Rates
Interest rates for an owner-occupied home and an investment property vary. Most of the time, interest rates for an investment property will be higher than those for an owner-occupied property. When looking at financing real estate as an investment, you will want to look for a low mortgage payment that won’t eat into your profit.
3. Calculate Your Margins
A good goal to set for an individual investing in real estate is about 10%. You will want to estimate 1% of the property value annually to cover for maintenance, homeowner’s insurance, homeowner’s association fees, and other expenses you may have.
4. Avoid Fixer-Upper Properties
If you are just now starting to invest in real estate, then you should avoid buying the fixer-up properties. When financing real estate, you want to buy below the market average with minor to no repairs needed. This will increase equity in the home and keep you from dipping into your profit for renovation costs.
5. Risk vs. Reward
Is the risk worth the reward for you? All financial investments should have a reward that is greater than the risk. You could have a great tenant, plus the real estate market is usually more stable than the stock market. If you don’t have a tenant, then you are still responsible for payments and real estate is an all-or-nothing investment.
How to Find Help When Financing Real Estate
There are more than enough options to choose from when financing real estate; you just have to choose which one fits your investment plan.
These are loans that follow the guidelines set by Fannie Mae and Freddie Mac, the large mortgage companies. They usually require a 20% down payment, and there is a limit of about 4-10 loans per account holder. They can be used for both owner-occupied and non-owner-occupied properties. There are higher interest rates and more requirements for non-owner-occupied properties.
Financing real estate through a conforming loan can be done through mortgage departments at banks, mortgage brokers, credit unions, and large mortgage lenders.
These loans are kept by the lender, unlike conforming loans which are sold to other mortgage investors. They are more flexible than conforming loans, and you can have more loans, but the terms aren’t as good, and they come with adjustable interest rates. Down payment requirements are also stricter than the previously mentioned loans.
If you are looking at financing real estate through a portfolio loan, you can mostly find them at local banks, savings and loans companies, and credit unions.
Hard Money Loans
These are loans that are asset-based. The lender will be primarily looking at the property that will be the collateral for the loan. These companies will be about lending, so the process can move quickly, and there is usually no limit to the number of loans an account holder can have.
These loans will carry higher interest rates and are usually for a short-term. They are good for most types of real estate investments. If you plan on financing real estate through a hard money loan, then you could find lenders at your local real estate investor association.
Private Money Loans
These are loans that are financed through individuals or IRA accounts, and they aren’t really in the business of lending. These loans can be flexible and fast with a lower interest rate but a longer term. It depends on the personal relationship with the lender.
If you are financing real estate through a private money loan, then you will want to look at networking online or at your local real estate associations or business meet-ups.
Seller financing is when the seller of the property accepts a price but in installment payments over a period of time. The seller is the lender. They can have good interest rates with a small down payment and no approval process. However, these require some real estate knowledge, along with a good attorney to review the mortgage and any other documents.
Financing real estate through seller financing can be done by negotiating with the seller of the property or by marketing to potential sellers and networking with real estate brokers.
Issues Which Could Arise When Financing Real Estate
Getting the Loan
Depending on the requirements of the lender, you may not qualify for their loan. Whether it be any of the ones discussed earlier, a lender can potentially deny you for a real estate loan.
Depending on the economy and the real estate market, those that are looking to fix and flip a property could potentially end up with a property that has negative equity, meaning you owe more than what it is worth. Also, depending on the condition of the property, you may end up spending more on renovations than it is worth.
If you are looking to own rental properties, then you need to have a plan to manage them. As the owner, you will manage all repairs and anything the tenant has a legal right to. You could potentially end up with a bad tenant that doesn’t take care of your investment, or no tenants at all where you are still responsible for the payments.
In conclusion, real estate is a good investment if you have the time and resources to invest. You will want to assess your own situation before deciding to invest and compare the risk to the reward of the investment. There are multiple avenues you can take to start financing real estate investments, but like with any other investment, issues may arise.