All loans are not created equally. Depending on the property type, timeframe and specific situation some loans work better than others. If you are into quick flips and rehabs a 30-year fixed loan doesn’t make a whole lot of sense. Regardless of what type of investing you are into you can probably find financing that matches your goals. Every investor should take some time to learn about what their options are and what is available. Finding a hard money or private lender may not appear to have much use now, but you never know what the future holds. Your ability to pick the best type of financing can help you close quickly and maximize the return. Here are the five most common financing options, and when you should use them.
- Lender financing. When people think of getting a loan they typically think of a traditional lender. It wasn’t that long ago when lender financing accounted for 95% of all investment financing. With the mortgage collapse many of these programs went away. What was left were traditional investment purchases with increased rates and down payments. These programs still hold plenty of value, but only in the right situation. Most of the investment loan options have long term amortization periods. As we stated in the opening, a 30-year fixed rate for a loan you plan on having four months isn’t the best program. However, if your focus is long term buy and hold rentals a 30-year option is the way to go. This gives you the security in knowing what your payment will be for the next 360 months. The downside is that these options require anywhere from 10-20% down payment, depending on the specific credit score and credit profile.
- Hard money lenders. With the decrease in traditional lending someone had to come in and pick up the void that was left. The area with the largest increase in financing over the past decade has been hard money lenders. These are lenders who lend based on their own specific rules and guidelines. Instead of following strict rules like a lender, they make guidelines that are important to them. They don’t need to see what the adjusted gross income is, as long as income is there. They may not need to see you have been self employed for a full two years if you have a history in the field. Hard money lenders often lend on a case by case basis with more importance placed on the property rather than the borrower. Since the rates and fees are typically higher, these type of loans are best used for the short term. Quick flips and rehabs where you plan on getting out within six months make more sense than long term options. Hard money lenders can be found more easily today than at any time in the past ten years.
- HELOC/cash out refinance. There are more ways of finding capital than you may realize. Perhaps you have the capital in your own portfolio without knowing it. After the mortgage collapse much was made regarding the difficulty in getting approved for a loan. In the past five years loan guidelines have eased up and getting a loan has been simplified. If you have a rental property, or even your primary residence, you should look at options of pulling capital from it. There are two main ways of finding capital from your property: home equity line of credit (HELOC) and a cash out refinance. With a HELOC you keep your existing first lien in place and add a new loan behind it. A HELOC gives you the option of paying interest only for ten years followed by a ten-year payment of principal and interest. The negative is that rate is based off the prime rate and not adjustable. If you are looking for a fixed option, you can opt for a cash out refinance. This rewrites the first mortgage and gives you cash at the closing in one chunk. The rate is based on credit score, equity and overall credit profile.
- Private money. Private money and hard money have plenty of similarities, although they are very different. With a private money loan there is typically a friend, family member or business partner providing the capital. Instead of evaluating your ability to repay they are more interested in their return on investment. A private money investor is generally a silent partner who has no interest, or connection, to real estate. They want to provide capital and let you run the project. This works well for investors who are looking for financing and are willing to make a little less as they are just getting started.
- Seller financing. There are many ways of getting a real estate deal closed. If you have exhausted all your financing options and still having trouble you may want to consider seller financing. As the name indicates seller financing is the process of having the seller finance some, or all, of the deal. Instead of paying a lender, you pay the seller every month. This works on deals where the seller may be having a hard time finding a buyer or the property has unique financing restrictions. Either way the seller benefits by generating income monthly and you take ownership of the property.
Finding financing for your next deal can be difficult but should never restrict you from moving forward. There are many ways to finance your next deal.
