Real estate is widely considered to be a secure asset that offers both the potential for income generation as well as the promise of long-term capital appreciation. For investors to fully capitalize on these benefits, they must cover the upfront costs of their investment, which typically surpass those of any other asset class, like stocks or bonds. Many investors resort to alternative financing options to achieve their aim.
In this article, we explore various financing strategies available to investors to assist them in funding their real estate investments, allowing them to take advantage of the opportunities in this sector.
Private Money Lending
Real estate investors often raise capital through private loans made by their family or friends. These loans are typically made with favorable conditions such as little or no interest to be paid and extended repayment terms.
Another form of private money lending is facilitated through non-institutional entities. These entities issue loans for certain specified activities such as real estate investing. This form of financing can offer investors an alternative to traditional bank loans, which can be especially advantageous for those with substandard credit scores.
As many private money lenders will often disregard the creditworthiness of an investor and consider ventures that most banks would deem as too high-risk, they can provide crucial funding for investors who may struggle to secure it through traditional avenues. However, the trade-off is typically higher rates of interest on loan repayments compared to traditional lenders.
Hard Money Lending
Another financing strategy is hard money lending. This is also a form of private lending, however, it is typically a more short-term solution. A hard money loan is usually secured by real estate such as a house or building and offers bridging finance to enable quick property purchases or to cover short-term needs such as when an investor is awaiting funds from another source.
The advantage of these types of loans is that they are typically approved within a few days, enabling investors to act quickly on an opportunity and stay ahead of their competitors. Hard money loans sometimes also have flexibility regarding loan terms such as duration, repayments and collateral requirements, making them an attractive option for investors. However, the interest rates charged on hard money loans are usually significantly higher compared to traditional bank loans, increasing the overall cost of borrowing for investors.
Homeowner Loans
A homeowner loan (sometimes referred to as a home equity loan) can provide an additional funding route for real estate investors wanting to invest in other properties. This type of loan enables an investor to access the equity in their home and obtain a lump sum payment to put towards acquiring a second home or an investment property.
The rate of interest on a homeowner loan is usually lower than that of a private money loan or a hard money loan. In addition, homeowner loans allow borrowers to arrange financing without having to consult a third party since they are usually arranged through their existing mortgage lenders. However, since these loans are secured against their home, investors risk losing their property if they default on the loan.
By considering their financing requirements and investment goals, real estate investors can devise a financing strategy that best meets their needs.
