Real Estate Investments: 6 Financing Strategies

 

 

 

Whether you are flipping real estate for quick profit or looking to buy a property that will generate cash flow monthly, you will need to secure funding before even considering an investment.

There are many ways to secure funding for your investments. Still, if you are not familiar with all the financing options available to help you reach your goals, we have that covered in our article, so read below and enjoy.

 

 

Conventional Bank Loans
Conventional bank loans are probably the most difficult to obtain. If you want to apply for a conventional loan, your bank will review all your sources of income, check your credit score, and usually require a 20% down payment or 30% in the case of estate loans.

Most lenders will require that you have at least 6 months' worth of savings dedicated to cover your mortgage expenses without defaults.

 

Hard Money Loans
Hard money loans are much more easily obtainable in comparison to conventional loans but that comes at a price. With hard money loans, you can expect sky-high interest rates which can range from 8% to 15% depending on the private business or individual. Lenders use the after repair value as a metric that will serve as the foundation of whether giving you a loan is a good idea.

If you aren’t intending to flip your property for a significant profit, we suggest that you opt for a conventional mortgage as the interest rates of hard money loans are too high and this type of loan should only be secured when you want to capitalize on a prospective real estate investment which can be turned into a profit fast.

Hard money loans are always asset-dependent. In addition to determining the value of the property after repairs, they will also take a look at your current assets rather than your creditworthiness.

 

Debt-Service Coverage Ratio (DSCR) Loan
Depending on the type of property you are planning to purchase, a DSCR loan might be the ideal financing solution for a successful investment. Lenders that provide DSCR loans take into account the monthly cash flow of certain property rather than your personal financial situation. 

For this type of loan, the property’s net operating income must exceed the mortgage payments. Usually, banks will ask for a minimum of a 1.20 coverage ratio. To find out how much of a DSCR loan you qualify for, you need to divide the NOI by the coverage ratio.

It’s worth adding that DSCR loans are the cheapest and best option on the market. However, they require at least a 20-25% down payment.

 

 

Private Money Loans
Private money loans are the best choice when you can’t obtain conventional loans due to various reasons, such as a lack of credit scores, for example. Private loans are most commonly sourced from friends or family members. However, if your close circle can’t afford to finance your investment, you can always visit real estate networking events. 

The rates of private money loans can differ significantly as you and the lenders are the ones that shape the contract. These loans are secured by a legal document and if you default on payments, the lender can foreclose on the property.

 

Home Equity Loans
This type of loan allows you to borrow funds if you use your current assets such as your residence for example, as collateral. The rates are fixed and your interest rate depends on your payment history, credit score, and so on. After you obtain a home equity loan and your credit score improves, you can easily renegotiate a lower interest rate.

As soon as you obtain your home equity loan, the use of the secured funds is entirely up to you.

 

Seller Financing
Some real estate sellers will opt to have a steady income rather than one big lump of cash. With seller financing, you negotiate a payment method that can be stretched out over several years, with a down payment and a negotiated interest rate. This is a very good method for obtaining a property if you can’t secure a conventional loan. 

Seller financing allows buyers to purchase a property without having to endure the burden of paying the whole sum outright.

 

Final Thoughts
They are many ways you can secure financing for your real estate investments, however, some are more practical than others depending on your situation. Go over our article and decide which financing option suits you best.