Option 1: Bank financing
What it is: The most well-known and “traditional” way to fund an investment property purchase is with a mortgage loan secured through a bank. These are mortgage loans used to buy personal homes but may have slightly different requirements.
What it offers: Bank loans will generally provide competitive rates and a variety of repayment terms, but they can be selective about to whom they loan the money.
Who it is best suited for: If you are a real estate investor with a strong and steady source of income, good credit history, and a large down payment, then bank financing might be the best option. Be sure that the property you want to buy is not distressed and that it qualifies with your bank of choice.
Option 2: Private financing
What it is: Another option to consider when seeking a funding source for an investment property is private financing. Unlike banks, private lenders loan money from a pool of individual investors. Some are general lenders, and others are more specialized, lending on properties in specific niche markets.
What it offers: The most significant benefits of using private financing are speed and flexibility. Most private lenders can close a loan significantly quicker than a traditional bank can and will have the ability to request underwriting exceptions. They are, however, more expensive and usually offer shorter lending terms.
Who it is best suited for: Private lenders are beneficial for financing people and properties that don’t meet a bank’s strict lending guidelines. For example, private financing may be a great option if the property is considered a special-use property (think a golf course or bowling alley). Private financing also shines when time is of the essence, such as in an auction or tax sale.
Option 3: Seller financing
What it is: Sometimes, the person or entity selling the property will be open to allowing the buyer to pay them payments directly. Essentially, the seller is providing the loan directly to the buyer. This is called seller financing.
What it offers: Seller financing is usually a short-term agreement, and the rate and terms can vary greatly depending on the seller. There are generally no underwriters to please or corporate guidelines to satisfy, as it is essentially an agreement between the buyer and seller. However, consulting with an attorney might be needed to ensure that everyone is protected legally.
Who it is best suited for: Seller financing is often used when the property isn’t financeable, limiting its ability to sell. However, if the property needs extensive repairs, the seller may agree to a two-year note to allow the investor to purchase it. The investor would then have two years to complete the necessary renovations, find a quality tenant, show income and cash flow from the property, and qualify for a more traditional loan.
Other financing options
While these three are probably the most common options for securing real estate investment financing, many other creative funding strategies exist. Things like borrowing money from a friend or family member, entering a partnership with a person willing to finance the property in exchange for ownership or pulling the cash from another asset you already own are just a few.
If you are unsure which option is right for you, or want to better understand each one, take some time to research, learn, and consult with a financial strategist before pulling the trigger.
At CleveDoesMore, the best part of our job is helping people make informed choices to minimize their risk while building equity and wealth for their future.