5 Financing Options For Your Next Deal
By Paul Esajian on March 8, 2017
You never know when a good deal is going to fall on your lap. When it happens it is essential that you are prepared to take action. One of the biggest hurdles for new investors is finding financing for deals. You may be able to find one source but every deal is different. Some deals work best with the flexibility that hard and private money offer. Others are long term holds where low bank interest rates make the most sense. Without the right financing for the right offer you can miss out on golden opportunities that come your way again. Here are five financing options for your next deal.
- Hard Money. The popularity of hard money lending has grown exponentially over the last ten years. In the past there were no more than a small handful of hard money lenders in each market. They were seen as nothing more than a last ditch alternative for homeowners looking to stop foreclosure or deal other unexpected issues. Since the competition was limited there were few restrictions on the rates, fees and terms they could charge. Today the hard money lending market is completely different. There are more hard money lenders in almost every market. They range from individuals to large groups each with their own unique set of guidelines and criteria. While the rates and fees are still above average they have come down dramatically from where they were even just five years ago. Access to hard money gives you the ability to present cash offers for quick closings. This access is essential if you are looking for any type of foreclosures, short sales or bank owned properties. Between your real estate agent, attorney or mortgage broker you can most likely find at least a few hard money lenders in every market.
- Private Money. Private money lenders are similar yet very different than hard money lenders. Where a hard money lender requests documentation to verify repayment a private money lender offers no such hurdles. A private money lender can be any friend, family member, co-worker or acquaintance that has access to capital and is willing to lend it. They are usually frustrated with their current returns and are looking for a way to invest in real estate but don’t have the time or education to do so. There are definite pros and cons with private money lending. A benefit is that the terms, rates and fees are often more favorable than a hard money lender. The biggest drawback is that most private lenders are limited in their capital. You may only be able to work on one deal at a time which can cause you to miss out if a good opportunity presents itself. There is also the issue of working with friends and family if the deal doesn’t go exactly how you planned. That being said the upside of closing a deal with someone you know often outweighs any downside.
- Lenders. As hard as it may be to believe it wasn’t that long ago when traditional lender financing was the main funding source for many investors. Lenders were fighting over themselves for a piece of the investor market. Every week new stated income or reduced documentation programs were rolled out. Almost all of those programs are long gone but lender financing can still be a viable option. The two biggest drawbacks with loan approval are credit score and income documentation. The minimum credit score for most investment programs are around 720. A 720 credit score is considered above average and not that easy to maintain. The other issue is with how income is documented. Lenders use the adjusted gross income as the number for qualification. What is beneficial during tax time is not always the best when seeking loan approval. If you are approved you can still take advantage of low interest rates, fees and have security for the long term. A bank loan works best for buy and hold rentals and anything else you consider holding more than five years.
- HELOC. There are times when the financing you need is right in front of you. Start by looking at your existing real estate portfolio. If you have a property with a strong equity position it may be your best option to find funding. A home equity line of credit (HELOC) is a new second mortgage loan on an existing property. With a HELOC you are able to draw as much or a little as you like with an interest only repayment option. The interest only feature allows you to reduce your payments and often see a greater return on your money. The most important qualifications for a HELOC are equity and credit score. Without at least 70% equity many lenders will not even consider the application.
- IRA/401K. Prior to obtaining any funding you should talk to your accountant or financial advisor if you have one. Pulling money from a self-directed IRA or a 401K can make sense in the right situation but may not work for others. It is important that you check for any fees and penalties before making a rash decision. You also need to know what the repayment schedule is and weigh that versus the expected return on your money. These are viable options but should be considered something of a fallback position.
You should always have at least three different financing options at all times. You never know when you will utilize hard money or when a lender financed deal makes the most sense.