Securing Funding As A New Investor
By Paul Esajian on July 7, 2014
One of the biggest complaints among new investors is the lack of financing available. In reality, nothing could be further from the truth. While there has been a reduction in lender investment programs available, there are still plenty of options out there for whatever stage of the business you are in. There are options ranging from FHA programs with minimal down payment to conventional mortgages with 20 to 25% and everything in between. Securing funds as a new investor can be an obstacle, but it will only be the end of the process if you let it.
If you are a new investor and are looking to dip your toe in the investing waters, there are plenty of viable options to consider. The best option is to look at an FHA mortgage on a two-family property that allows you to put down just 3.5%. In such a scenario, you can live in one unit while having a tenant pay down your mortgage in the other unit. Your down payment can come from your own funds or can even be a gift from a family member. You can enjoy the benefits of not having any other mortgages on your credit report by putting down just 3.5% while simultaneously getting a taste of how it feels to be a landlord.
If you are a little farther advanced in the business and you have a primary residence, you will have a different set of programs. Typical mortgage options on investment programs range from 10-25% down, depending on the number of units and credit score. This can be a difficult option if you don’t have your own funds to put down. If you are in this boat, you can look to partner up with someone that may have the financing but doesn’t want to get too involved in the business. Finding a friend, family member, coworker or contact that has money and is interested in investing is not as difficult as you may think. Something as simple as a post on social media or a blast email can get the ball rolling. This may be uncomfortable, but if you really want to get started this can be a great way to go.
If you have closed a deal or two and want to get more involved, you can explore hard money options. Hard money has a negative connotation to many investors who think of this as a somewhat shady source of funds. In today’s market, there are more hard money lenders than ever before. Most of these are corporations with LLCs and business plans. The idea of walking into a smoky bar and asking for money is not in line with what today’s reality is. It is easier than ever to find a hard money lender and easier than ever to work with them. This doesn’t mean that everyone with a desire for funding will get approved, but with many more self-employed buyers having a tough time getting approved at banks they have opened up their guidelines. Most hard money lenders do require some kind of hard assets to back their loan, but if you have a plan and income coming in, hard money could be the way to go.
Having access to hard money can change the way you invest. Instead of waiting for lender financing or only looking at a particular price range, you are free to look in areas and properties you previously may not have. Short sales and foreclosures are diminishing every day, but they are still around. You will greatly increase your odds of getting offers approved by using hard money on these properties. The rates and fees for these loans are much higher than traditional loans, but if it allows you to close more deals a year it will be worth it.
If you are unsure of what your options are, start with knowing some of the mortgage basics that are required. Approval is based on credit score, income, assets and down payment. Before you take the step in speaking with a bank or mortgage broker, you should know what type of borrower you are. There are many websites available where you can find your credit score and see what the exact monthly payments are on your debts. You can calculate your monthly income by dividing your gross income by twelve. Your down payment amount should be pretty straightforward, but know that lenders will always look in 5% increments for down payment amounts. As far as credit approval goes, there isn’t much difference between putting down 12% or 14%.
Once you have all of these items in line, reach out to a lender to see what you can do. They will be able to tell you if you are approved and for how much. There are also many good lending sources and ideas to consider at local networking meetings. If you have a desire to get started in the real estate investing business, there are ways you can do it without having much if any of your own funds. All it takes is a little legwork and the ability to make contacts on your end.
In today’s world of social media and increased technology, it is easier than ever to find solutions for whatever issues you have problems for. Finding funding as a new investor is no different.