Investing in real estate is a great way to turn your dreams of being an entrepreneur into a reality. This is especially true if you chose the right properties and can get financing that won’t break the bank. That’s right you don’t need to have a million dollars in the bank to invest in real estate as you can follow what the pros do and use other people’s money.
With that in mind, here are some tips on how to get money for your real estate investments. These are not “get rich quick” schemes; instead, they are proven techniques to get the financing you need to start investing in real estate today.
Before we get started, keep in mind that no investment is without risk and if you are taking on debt to finance an investment then you need to make sure you understand the situation, how you plan to use the money, and how you will be able to repay the debt. If not, then you might want to pass on an opportunity as it is better to be safe than sorry.
1. Federal Housing Authority (FHA) Loans
While these loans used by most people to finance a purchase of a single-family home, the rules also allow first-time homebuyers to acquire multi-family homes as well – this includes homes with up to four units. A couple of the advantages of an FHA loan are low, down payment requirements as well as the expanded credit score criteria. Borrowers with a FICO as low as 600 may be able to qualify for these loans.
However, you want to keep in mind that FHA loans are not offered by every lender and they usually have higher closing costs than traditional loans. Besides this you will also want to get yourself up to speed on the requirements for multi-family homes as the cash generated by the rental units can be used to help you qualify.
Also FHA loans require the property to be the borrower’s primary residence as these loans are not meant to finance investment properties. Lastly, these loans are for first-time homebuyers, so while they are an option to finance your first real estate investment, you can’t keep going back to this well.
2. Private Money Loans
These loans are not offered by banks; instead, they come from private lenders and given the accelerated closing processes for both, they are often a preferred option for real estate investors. While private money loans are usually obtained for friends, family, or close acquaintances, they can also come from investment groups who specialize in this sort of lending.
The benefit to friends and family money is that underwriting is usually heavily weighted towards the pre-existing relationship rather than a formal credit application. Though you want to keep in mind that mixing money with friends and family can end badly.
While another growing category of the private loan space. These are those loans offered by investment groups who specialize in lending. These groups are not banks and are usually not licensed to provide loans for single-family homes.
In talking to hard money lenders in NY, Gauntlet Funding, these loans are often used by developers as the lenders “specialize in funding high-risk loans for these unconventional borrowers.” This can be anything from vacant properties to those which require significant renovation before being brought back onto the market.
As such, these loans are often seen as a fast and flexible way to get financing. However, you want to keep in mind that loans from professional groups might come with higher interest rates than traditional bank loans, though this usually isn’t seen as an issue if the plan is to refinance the loan shortly after acquiring the property.
3. Adjustable-Rate Mortgage (ARMs)
One attraction of these loans is that they generally have lower interest rates than fixed-rate loans. However, just because interest rates are low today doesn’t mean they will remain so in the future.
Some ARMs only offer a low rate during the first three to five years of the loan’s term, from there the interest rate will get locked in at a higher rate. This is what happened to many people during the sub-prime mortgage crisis in 2008 as many people find out could no longer afford their mortgage payments after the rates increased.
If you do choose an ARM to finance your real estate investment, then make sure you have a plan to handle any adjustments in the rate going forward. This is especially true if you are considering holding the property for the long term as an uncertain rate environment could impact your profits.
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