Financing 101 for real estate investors
There are going to be times when you just don’t have enough money to invest in a property. (Unless you have a trust fund, or an extremely high paying job, and if so, kudos to you on your good fortune!)
If you don’t, though, that doesn’t mean you can’t live out your fantasy in real life! What if we told you there’s a way you can invest in real estate…even with no money.
No, we are not kidding. In fact, there are several ways, not one.
Let’s get started with investment financing 101.
Do you have a good credit score?
There are two scenarios here:
- You don’t have funds to invest but have a stellar credit score.
- You lack both funds and a sufficient credit score.
An undesirable credit score
In the first scenario, a viable option would be to approach private lenders. For one thing, they’re slightly more flexible than traditional banks. Second, your request would be processed at a much faster rate than with a bank.
You can either turn to:
- Corporate private lenders
- Or personal private lenders, including friends and family
Find someone you trust who has adequate cash to fund your property investment. (Perhaps you can entice them with an interest rate that’s difficult to refuse?)
A stellar credit score
In this case, you can use your credit cards. Again, you aren’t using cash here. It’s a great investment financing option if you have a solid credit history and high enough limits to accommodate this.
Do you have the luxury of time?
Perhaps the most widely known investment financing option, among others, are government loans. These are perfect if you’re not looking to turn a quick profit, as this approach is more suited for property investments with multi-month contracts.
However, if house-flipping is what you’re eyeing, government loans won’t be processed fast enough (we’re talking months here).
You do have many options when it comes to government loans, namely:
- FHA loan
- Energy-efficient mortgage (EEM)
- USDA loan
- VA loan
- FHA Section 203(k)
- Good Neighbor Next Door Program
- Local Grants & Programs
- Native American Direct Loan
- Fannie Mae or Freddie Mac
Some of these government loans, like the VA or USDA are more flexible than others, especially if you purchase the (intended) rental property as your primary residence. But they do have other stipulations, such as you must be a veteran (VA) or meet a certain income range (USDA), for example. But they are workable if you plan to stay for at least a year and then convert it into a rental property after moving out.
Another path you can take is investing in an owner-occupied rental. These are multi-unit properties (3-4 units at most) that fall within a residential category according to mortgage lenders. You’d just need to move into one of these units and then rent out the others.
And a standard FHA loan, which could be offered to you at a lower interest rate as opposed to typical investment property financing.
Do you have the investment chops?
If not, how about equity partnerships?
This method involves forming alliances. For example, you could find a run-down property to invest in and use your partner’s working capital and good credit score to finance it.
That said, prior to forming a partnership, make sure you discuss your roles, goals, risks, and returns at length. Each of you should bring something valuable to the table in order for this to work.
OK, you’ve made it to the end. While there’s no exam, you certainly know more than when you started reading. Great work passing financing 101 for real estate investors!