There’s no big mystery to real estate financing when buying a home but are there other options that would-be investors should explore? Investing in real estate is one of the key strategies in building a diversified portfolio and growing your personal wealth.
There are many different types of real estate financing used when investing in property, just like the many diverse opportunities for investment such as single family homes, rental homes or apartments. Then there’s the type of approach the investor plans on using like flipping, rehabbing, buy and hold, or wholesaling that makes the money in real estate.
Our list isn’t all-inclusive, but will give you an introduction into some of the real estate financing systems available for property investors to finance their purchases.
- According to one recent study, almost a quarter of investors choose to pay all cash for their investment property. Terms like “All Cash,” doesn’t refer to actual notes being handed over but rather a cashier’s check or a wire transfer from the bank. This is the easiest form of real estate financing, as there are typically no complications:
- A conventional mortgage is the vehicle many investors choose for their real estate financing using a cash down payment and a traditional home mortgage. With this type of financing, the buyer borrows the funds from a bank, mortgage broker, or credit union; the institutions that provide conventional mortgages by acquiring the funds from another party or reselling the loan. Conventional mortgages are the most common type of mortgage used by home buyers and usually offer the lowest interest rates.
- The FHA – Federal Housing Administration – provides government backed loans to buyers who are going to live in the property. This immediately rules out pure investment property but there is a concession to the rule that permits an FHA-financed dwelling to have as many as four separate units as long as the investor is living in one of them,
- A 203K loan is an offshoot of the standard FHA loan. This loan allows a homeowner to purchase a house needing rehab work and finance the work through the loan itself. The same rule applies here that the owner must also be an occupant and a 203K loan will work for duplexes, triplexes, and four-unit buildings.
- A portfolio lender is a bank or credit union that lends money belonging wholly to the institution. By using their own money, loan terms and qualifying standards are often more flexible with terms acceptable to each individual company. Portfolio lending isn’t a widely advertised form of real estate financing but can be found through referrals and networking with other investors.
- Home Equity Loans and Lines of Credit are when an investor uses the value – equity – accrued in their own home to finance the purchase of investment properties. This form of real estate financing is available through banks and other lending institutions. There are different products available like a HEIL (Home Equity Installment Loan) or a HELOC – Home Equity Line of Credit – that let you use your existing equity.
- Owner financing is when the owner of the property in question, is able to fund the property purchase. In this scenario, the monthly payments would be made to the owner instead of a bank. Property purchased using this type of real estate financing must be mortgage free. Any loans outstanding against the property must be paid back immediately or face foreclosure.
8. Private money comes from financiers who offer real estate financing by lending the cash to buy property in exchange for a specific interest rate. Their investment is secured via a mortgage or promissory note on the property; should you default on the loan, they can foreclose and take the house – just like a bank or other loan. The interest rate given to a private lender is usually established up front and the money is lent for a specified period of time, anywhere from six months to thirty years