Today, there are more ways to finance real estate investments more than ever. The ideal financing option depends on the condition of your investment, how much you want, and the type of property. Investors who are starting in the real estate business have fewer choices. (Image Credit: Wayhomestudio/Freepik)
However, as your portfolio continues to grow, so will your borrowing options. Here are the best financing options for real estate investors.
1. Hard Money
Hard money lending is a loan obtained from individuals or private businesses, at terms that could be stricter than a traditional loan. Though the terms are more stringent, it has lenient criteria. According to experts from NewSilver.com, hard money lending has several defining characteristics, including short-term lengths (6 to 36 months), the loan is based on property value, most lenders do not mandate income verification, and funders can finance the project in days.
Though hard money loans are a quick way to fund your project, they can get complicated quickly. Although hard money loans are available for all property types, they are perfect for investors who want to fix-and-flip a property.
2. Investment Property Mortgages
A conventional mortgage is a good option for new real estate investors. These mortgages operate the same way as your home property mortgage, but the lending requirements and interest rates are higher. The investor can get a loan requiring 10 percent of the property value for an owner-occupied property.
Larger properties such as a duplex, high-rise apartment or multifamily property might need a 25 to 30 percent down payment. The borrower can pay much less if they apply for a Federal Housing Administration (FHA) loan. As with most mortgages, the lender will want a FICO credit score of 620 and above to qualify you for the loan. If your score is below the required figure, you can offset it by paying a higher down payment or attract a higher interest rate.
Before borrowing, ensure you have enough money to maintain the property. It is advisable to have cash for covering insurance, taxes, interest, principal, and other association payments for at least six months. Too if you opt for a mortgage to finance your property investment, try using a mortgage calculator before signing up for the deal.
3. Peer-to-peer Lending
This form of financing is becoming famous of late. Online money transfer utilities such as PayPal have facilitated the faster transfer of funds, and they have fewer regulations and less red tape. P2P lending links real estate investors with lenders willing to fund them through non-traditional loans.
This type of financing requirement is a bit high, as most lenders require a loan-to-value ratio of 65 percent. Therefore, the investor may not get all the money they need for the project. Also, there is no guarantee that you will get the loan even if you meet all the requirements.
To increase your possibilities for getting a peer-to-peer loan, you should create an enticing loan listing and market it well. This type of funding is not for everyone.
4. Government-sponsored Loans
The most popular government-backed loans are USDA, VA, and FHA. These loans are attractive with their low down payments of up to 3.5 percent and relatively low-interest rates. USDA loans are perfect for smaller, rural, or suburban homes with more flexible interest rates and do not require actual down payments. You can refer to the USDA eligibility map to check if you are eligible for a USDA loan. For you to get an FHA loan, you need a credit score of 580 and higher.
Borrowers with a score of 579 are eligible if they agree to pay a down payment of 10 percent. The government also requires that the property you are purchasing be your primary residence for at least one year, and you should move in within two months of closing. It is a great deal, considering you can fix-and-flip the house later.
Only veterans qualify for VA loans, which have favorable features. To qualify, you must have served 181 days of active duty during peacetime, 90 days of active duty during the war, two years of regular service, six years for National Guard Members, and Reservists.
Spouses of officers who died on the line of duty or wounded in the war are also eligible. Though the government guarantees VA loans, they are given by a financial institution such as a bank. Therefore, the requirements may vary from bank to bank.
5. Portfolio Loans
These are for seasoned investors looking to invest several properties at a time. If you want to invest in a community of single-family property or a block of homes, consider a portfolio loan. Like you save much when you buy goods in bulk at the warehouse, lenders offer more savings if you mortgage several properties simultaneously.
You also reduce the paperwork and save time and effort since you will be making one loan application and one closing for multiple properties. Most real estate investors get funding from other people and financial institutions. It would help if you were careful to invest the money well, lest you lose your property.