Acquiring financing is the starting point of real estate investing. This is true, regardless of if you are an experienced investor or a first-time buyer. How you approach financing real estate frequently determines how the remainder of the transactions pan out. Investments backed by private or hard money can be settled in just a week and a half, with no problems.
Purchases that are financed by lenders can take up to forty-five days, with numerous obstacles to surmount. All approaches have a particular set of weaknesses and strengths, depending on your credit rating and long and short-term targets. Whatever financing option you choose, it should be sorted out before searching for any houses. Listed below are four of the most common ways of buying real estate:
A Hard Money Loan
Hard money loans are any loans acquired by groups of individuals, or individuals, for the purpose of buying real estate. Over the last ten years, the quantity of lenders offering this type of loan has increased significantly. Historically, hard money loans were used to prevent foreclosures.
Nowadays, they are an effective financing strategy in virtually all markets. Compared to conventional lenders, lenders who deal with hard money are the very similar in some ways, yet entirely different in others. In one sense, they still adhere to certain criteria and guidelines like normal banks. Then again, they make their decisions based on the house primarily, instead of the borrower.
Hard money loans are best suited for borrowers that have a poor credit rating or have difficulties reporting their income. Hard money lenders will overlook income problems, provided that the investment makes sense.
The real estate should have a potential for profit, and the borrowers must be in a position to offer some form of collateral. Hard money enables borrowers to sell fast, and normally complete more transactions during a year.
The drawbacks are higher fees and overinflated interest rates. Hard money loans are most suitable for rehabbing properties and flipping real estate, where the goal is to be started and finished as soon as possible.
A Private Money Loan
Usually, private money lenders are individuals who lend from their self-directed IRA or savings accounts. In all likelihood, they have considered real estate investing for a while, but were unsure about how to get started. Private money lenders could be any relative, friend, work colleague, or acquaintance, who has some spare capital.
They share similarities with hard money lenders because they offer you the money than normally take a back seat. They are not interested in credit rules and concentrate almost completely on the profit they stand to make. They are looking for a higher yield on the property deal than the yield they are receiving from where their money is currently invested.
Also, they are concerned about the worst case scenarios and possible risks. Hard money lenders understand and know everything that might not go to plan. In contrast, private money lenders are not as familiar with selling real estate and have to be guided through the procedure carefully. Providing you clarify all the details prior to exchanging any cash, private money lenders might be a good option.
Historically, if you wished to buy a property for investment purposes, your sole option was a conventional lender. Many things have changed in the mortgage industry during the last ten years, however. It is always more difficult to obtain real estate financing from traditional lenders, compared to a normal loan, for a number of reasons.
Because investors do not live in the home, they are more inclined to wash their hands of the deal, if the property falls in value below the loan amount. This scenario is known as ‘being underwater’.
Typically, banks regard investment real estate loans as risky, and charge higher interest rates and provide shorter periods for repayment than normal loans. In addition, on the secondary market, these loans are more difficult to sell.
Down payment schemes and limited documentation are now a thing of the past. To get a loan from a traditional lender, you require a twenty percent down payment at least, a good credit rating and a low ratio of debt to income. Each stage of the procedure is analyzed, and the underwriting rules are far more stringent.
Notwithstanding, rates of interest have remained close to a record low for the past few years, most of the time. Traditional loans are the recommended option if you want to focus on rental buy and hold properties.
A solid down payment and modest rates will allow you to increase your cash flow and develop equity. While there can be many issues to address along the way, traditional loans are an excellent option in certain situations.
For novice investors, FHA (federal housing administration) purchase options can be an ideal fit. These types of loans are backed by the government and have specific mortgage rules. To be approved for FHA loans, borrowers have to earn below a particular salary, depending on the property’s zip code.
As well as offering lower rates of interest, FHA loans have certain guidelines that must be followed. FHA borrowers can buy a one-family or two-family house, with a down payment of just 3.5 percent. This is good for first-time investors, who want to reduce their payments each month. If they purchase a two-family house, they can rent one unit out while living in the other unit.
They can enjoy all the tax advantages linked to rental home ownership, and significantly reduce their mortgage payments each month as well. FHA loans only apply to properties that are occupied by owners, so they are only usable once. Lots of investors have taken this option to determine whether they are happy having tenants and to try and make a success of their initial purchase.
A good investor should explore and be aware of a range of options for financing. The options listed above are merely some of the most common ones. Decide which option is most suitable for you, depending on the kind of deal you want to complete.