If you are one of the lucky Americans who already own a home, yet is considering buying an investment property, pay attention to these five important ideas for financing your real estate investment transaction.
How to Find Financing
If you are new to the real estate investment world and have a clean credit report and low debt ratios, a traditional bank is your best bet for financing. Many of the large banks can offer low rates on mortgages to investors with good credit. While investment money is typically a little more expensive, you can still expect great rates that can increase your buying power.
According to Bankrate.com, the average interest rate on a conventional 30-year home loan is 3.65%, with 15-year rates hovering around 2.50%. These rates are some of the lowest in the history of mortgage lending. If there was ever a better time to finance real estate, we haven’t seen it.
Portfolio loans are mortgages that a bank keeps on their books, rather than selling on the secondary investment market. Many credit unions or smaller banks offer these types of loans to investors with multiple properties. The loans are typically a little higher priced than their big bank counterparts but have easier qualifying terms.
Portfolio loans are useful; having comparatively fewer regulations associated with them and higher credit limits. You can find portfolio lenders by reaching out to local investment communities or asking your real estate agent. Real estate agents have an extensive network of lenders with which they work, and many have nurtured those relationships specifically for the benefit of their clients.
A “seller carryback” is a loan, or portion of a loan, that the seller provides and holds. For real estate investors, seller financing is one of the best options available. A property that is seller-financed means that the seller has agreed to personally finance the mortgage at a “market” interest rate with a specified down payment. These loans typically have a shorter term but are a great option for investors who look to re-sell the property in the near future.
The seller has the possibility to either finance the entire property or the difference between the real estate value and the loan available to the consumer. Theses loans are an excellent opportunity to get immediate financing with a minimum amount of documentation and regulatory headaches. A realtor or escrow company can assist with drawing up the mortgage docs.
Low Capital? Pursue a FHA 203K Loan
FHA loans are a great strategy for fledgling investors with little start-up capital. With a down payment of only 3.5%, an investor can finance the purchase balance, and with repair costs allowed to be calculated into the loan balance. The only downside to 203K loans is that the buyer will have to live in the property for one year before they can rent it or place it on the market.
There are important details to consider when enlisting these types of high-LTV loans. With a smaller down payment, your loan balance will be higher, which means it is vital to determine your cash flow before considering it as a rental property.
Private Lending Solutions
Successful and savvy real estate investors are always seeking to build up their portfolio of properties. A financing strategy many of these investors utilize is private capital. Private lending can come from family or friends, but there are also private money lenders that can provide quick financing at comparative rates.
House flippers and fixers typically use this type of funding to snap up below-marked priced rehab properties quickly. The rate may be high, but if you plan to quickly turn around and sell the property, you can cut the annual percentage rate in half.
Private Money Pools
Private lenders use funds pooled from investors to provide real estate borrowers with quick access to the capital needed to finance their properties. There has also been an explosion in this market with the addition of crowdfunding for real estate. According to current regulations, accredited investors with more than $ 1 million (excluding their home value) are eligible to participate in such crowdfunding endeavors.
Putting Your Retirement Funds to Work
If you own a Solo 401K or SEP IRA, you can legally use those funds to finance an investment opportunity. For years, people have been using their retirement funds to start a retail business or invest in one, but you can also use it to finance your real estate investment.
Why Use Solo 401K for Property Investment?
- Access to tax-free capital from the sale of investment property
- You have tax-deferral benefits associated with the capital
- You can invest freely with the capital
- Financing of real estate projects with tax-free, non-recourse loans
- Ability to choose from a wide variety of investments
Using a Solo 401K plan to invest in real estate comes with a few restrictions. First, you must put the capital gains or net income back into your 401K plan. Second, all costs and expenses involved with the investment property should originate from the retirement account.
While it does require a fair bit of due-diligence, investing into real estate is a great opportunity to take advantage of record-low mortgage rates and use them to make money. There are few better advantages in life than earning profits with “OPM” – Other People’s Money.
With the popularity of real estate crowdfunding sites and an extensive selection of private money lenders to choose from, access to capital should not be an issue, as long as you are a responsible investor who has done his or her homework in advance.