There are multiple options for funding real estate deals. Selecting one depends on the investor’s financial situation and the circumstances surrounding the real estate deal. The following are five of the most popular ways to fund your next deal.
Funding with cash does not mean the buyer brings a suitcase full of bills to the closing table. Cash financing refers to investors who are purchasing property with their own capital rather borrowing money. The cash is usually transferred with a cashier’s check or by wire transfer. Cash investors tend to pay less per square foot for properties because they can purchase properties that wouldn’t qualify for lender financing due to their poor condition.
In today’s market, many investors finance with conventional mortgages. They often choose this option because they have had historically low-interest rates in recent years. A conventional mortgage often requires a cash down payment of at least 20 percent of the purchase price, a sufficient credit score, and proof of income.
Hard Money Loans
A disadvantage of conventional mortgages is that it can take up to two months to get financed. Sometimes, investors choose hard money when they need to close a deal quickly. Hard money loans usually are available within a few days because a private individual or company lending the money doesn’t perform time-consuming income verifications and credit checks. Instead, hard money loans are based on the value of the property. These loans are characterized by high-interest rates. Due to their short terms of three years or less, an investor should plan multiple exit strategies for hard money loan deals. Some investors use hard money loans as a bridge until they secure other financings.
Federal Housing Administration (FHA) loans are designed to lower barriers to homeownership. As such, these loans have down payments as low as 3.5 percent and are available to people with less than stellar credit. Properties must be owner-occupied. However, FHA financing can be used on properties with up to four units. An investor could live in one unit and rent out the rest. FHA loans require proof of income and employment.
An outside lender is not involved with seller financing. The buyer and seller sign a mortgage agreement and the buyer makes monthly payments to the seller. In the future, the seller may decide to cash out by selling the note. In that case, the buyer would make payments to the new note holder.