Finding deals is one thing, funding them is another.
There are a handful of ways you can fund your next purchase. While all the exotic stated income and 100% loan products are long gone, there are other options available. Some require some upfront capital, but most of them require nothing more than a plan in place and a little hustle. More people are looking to get involved in the real estate business than ever before. Many of these would love to be nothing more than a financial partner. They supply the capital and you do all the dirty work. On the surface, you may end up doing more than your share of work but considering you wouldn’t have a deal without them this is more than acceptable. A lack of financing should be nothing more than simply an obstacle to building your empire. Here are five ways anyone can fund their next purchase.
- Bank loans. Let’s start by getting the most obvious one out of the way first. Even though there are fewer traditional lending options than in previous years, they are still out there. Depending on the number of units you are looking at, your current housing situation and your credit score you could be looking anywhere from 3.5-25% down payment. If you don’t own a home, you could utilize an FHA loan option for any property 1-4 units. This allows you to put down a minimum of 3.5% as long as you plan on living in the property for at least one year. If you have an existing property you are looking at 10-25% down, depending on the number of units. Bank interest rates have crept up, but they are still historically low in the grand scheme of things. If you are considering a rental purchase, you should consider a traditional lending option.
- Hard money. There is something in the lending world called hard money loans. This sounds a bit intimidating on the surface, but it is really nothing more than a traditional lending alternative. Hard money lenders operate on their own set of guidelines. Instead of focusing only on credit score or debt to income, they look at the big picture and whether the loan makes sense. Many investors have several write offs that suppress their adjusted gross income. Big banks only use this number for qualifying purposes, whereas a hard money lender takes a common-sense approach. Hard money lenders can be any individual or group that lends money. You can find them with a few clicks of a mouse or through personal contacts such as your real estate agent or attorney. For use of their money they will charge an increased interest rate (11-15%), higher fees (2-4 points) or take a percentage of the profits. The benefit to you are quicker closings, no red tape and the ability to close more deals throughout the year.
- Friends & family. If you turn on the TV almost any night you can probably find a few shows dedicated to real estate investing. There are more would be investors than ever before. In fact, right now in your own inner circle you probably know someone who is actively looking to invest but doesn’t quite know how. Here is where you can utilize your contacts and make a deal happen. Send an email to your friends, family, co-workers and anyone you can think of. Explain to them that you are looking to get started in real estate and are willing to take on a financial partner in the right situation. If you email 200 contacts, you can bet you will get at least a half dozen interested parties. They will surely have many questions and want specific numbers, but you will have at least got the ball rolling and potential financial backers lined up.
- Existing portfolio. If you have an existing portfolio you should explore options of pulling capital out. There are numerous ways of pulling cash out of a property. First, look to see if you have any equity. Property values have gone up over the past twelve months and there is a good chance you may have more equity than you thought. If so, you can explore the option of either a cash out refinance or a straight home equity line of credit. There are pros and cons with either option, but always ask your lender or mortgage broker for numbers on each. In some cases, a line of credit can be easier and a better long-term option. In others getting into a reduced term at a better rate with all the cash in hand makes more sense.
- Partner up. If you go to any networking meeting or investment club you will find someone interested in investing with a partner. They may not come right out and say it, but they will drop enough clues so you know their intentions. Partnering up with someone is something you should do only after you have built up trust on both sides. Unfortunately, there are some people who make their living defrauding innocent investors. This is the exception, rather than the norm, but you need to know who you are partnering up with. That being said, a good partner can help open doors and close more deals than you could imagine. You will make more money with a partner than anything you can do individually.
There is money out there if you are willing to find it. If you can find deals, there is a good chance there is capital available to fund it.
