In the modern financial market, there are literally dozens of real estate finance options to choose from. Operating on an all-cash basis is impractical for most people, and investors know that splitting up your cash among multiple properties can yield 50% or more revenue return, meaning even those who could go all-cash typically prefer not to, despite the added risk. Traditional mortgages are still the most common arrangement, but the 20% down and tight lending terms often make them unappealing or impossible for many real estate investors. The security of all-cash and the low interest rates of conventional mortgages fail to be a best fit for all due to their other limitations, but there are other real estate finance options that offers their own benefits, including these eight:
1. Portfolio Loans
Portfolio loans, unlike conventional mortgages, are not re-sold on the secondary market to big banks like Fannie Mae and Freddie Mac. Consequently, the lenders are free to set any terms they are comfortable with rather than being forced to follow the strict guidelines imposed by the secondary buyer. This can make portfolio loans easier to obtain than traditional mortgages for investors and self-employed borrowers.
Since most lenders that deal in portfolio loans do not advertise the fact, it is important to use referrals, investor networks, and other tools to find a lender. Otherwise, you will simply have to call each lender and ask them point blank if they offer portfolio loans.
2. FHA Loans
The Federal Housing Administration is involved in insuring mortgages held by banks all across the country, and they offer a program to help people purchase properties in which they intend to live. Thus, an FHA-backed loan does not apply, strictly speaking, to “investment property.” However, the exception clause allows you to use an FHA loan to buy a home with up to four units if you live in only one of them.
A low down payment minimum of only 3.5% is the main draw to this type of loan. If you put less than 20% down, however, you will have to buy a Private Mortgage Insurance policy, which will increase your monthly payments by a small amount.
3. 203K Loans
A 203K loan is the same as an FHA loan in most respects. It differs, however, in that it gives you the ability to borrow extra money to finance rehabilitation projects. This additional funding is conveniently built right into the main real estate loan.
4. Owner Financing
If you can find a homeowner who owns his home outright, wants to sell, and is willing to provide the financing, you can skip expensive bank fees and make the payments directly to the owner. You will likely have to pay a higher interest rate, but the deal can be done faster and simpler.
The reason the seller cannot hold a mortgage on the property with owner financing is that most mortgages have a due-on-sale clause that allows the mortgage holder to immediately foreclose on the property should the owner sell it. Some investors risk that the bank won’t do this, but, most insist the owner be 100% the owner.
5. Hard Money Loans
A “hard money” loan is one lent out by a private business or investor rather than a bank for a short-term investment purpose. Although these loans can be risky, they also allow investors to turn a quick profit by flipping or rehabbing lucrative properties. They also facilitate grabbing such properties before it is too late since hard money loans are often processed fast.
The decision to grant the loan will be based mostly on the value of the property itself rather than on collateral. The period can range from 6 months to 3 years, and the interest rate is higher than normal at 8% to 15%.
6. Private Money Loans
These loans are much like hard money loans, but the lender and borrower have a closer relationship. This relationship makes it easier for terms acceptable to both parties to be negotiated, and the interest rate, points, and fees are typically much lower. The lender can still foreclose, however, if the borrower fails to live up to his/her obligations.
7. Home Equity Financing
If you already have equity in a piece of real estate, it is often easier to use your existing property to take out a home equity loan than to secure a brand new loan. This can take the form of an actual loan (HEIL) or of a line of credit (HELOC), and banks will often approve if you have sufficient equity built up.
The bank will only lend a certain percentage, usually 90%, of the total value of your existing property, minus the amount you still owe on that property. This is often at least enough for a down payment on the new real estate you are interested in. Additionally, you may be able to deduct the interest paid on the loan from your taxes.
8. Commercial Loans
The other seven options listed above are mainly used for residential real estate financing, but commercial investments can also be quite attractive. A commercial loan will normally have somewhat higher interest and fees and a shorter term. A business line of credit is another option that is often used for flipping commercial properties.
While, for other loans, the borrower’s income level is usually the number one approval criteria, with commercial loans, it is the revenue that the property is deemed capable of generating. Your personal financial skills and history in the arena of commercial real estate investment will also be closely scrutinized.
To find out more about the real estate finance options listed above, and more, feel free to contact the experienced investors at Capital Concepts for a free investment consultation. Simply call 844-246-0917, and we will be happy to help you sort through the many possibilities to find the fit that’s right for you.
Josh Nelson is an online freelance author who has completed over 2,000 successfully published articles, including dozens on financial topics.