Real Estate Financing Options

The real estate industry is one of the most promising and surefire ways of making money; however, funding is the most important determinant of success in this area. To make an informed decision about the real estate financing options you need for your investments, you must understand your financing facilities regardless of whether it is your first time or you are an experienced trader in the stock market. Below are five typical sources of funding for real estate investments that you ought to look at.

1. Traditional Bank Loans

This is owned and operated by the conventional methods of financing where real estate investors mainly borrow funds from commercial banks in the form of loans. These loans are available with commercial banks and credit unions, and they come with very steep conditions such as credit score, income proof, and at least a 20% down payment.

Pros:

• Competitive interest rates
• Fixed or adjustable-rate options
• HUGE loan repayment periods, which range from 15 to 30 years.

Cons:

• Lengthy approval process
• It does require a very good credit history, as well as a satisfactory financial track record.
• Higher down payment requirements

Sometimes, the most suitable bank loans are conventional bank loans when one has a sound financial record, is fairly standardized, and when the payment will be stretched out over the long term.

2. Private Money Lenders

Private money lenders are people or companies who provide funds for the investors for investment. Some of these lenders pay much attention to the value of the property and the amount of money the borrower is seeking to borrow compared to considering the borrower’s credit score.

Pros:

• Flexible loan terms
• Quick approval process
• Less stringent credit requirements

Cons:

• This means that the interest rates charged on the loan are higher than that of the normal loan.
• Consequently, a shorter loan period ranges from a period of 6 months to a period of 2 or 3 years.
• Most will demand some form of security in addition to the property being used as collateral.

Private money lenders are also favorable when one needs funds urgently or probably when one cannot qualify for conventional loans.

3. Hard Money Loans

They are short-term, implicitly issued at a high interest rate to finance the acquisition of real estate. Such loans can be obtained from private individuals or organizations, and their amount depends upon the value of the property rather than the ability of the borrower to repay them.

Pros:

One of the merits of short-term loans is that they are approved and funded as early as one week.

Cons:

• Down payment of up to 30% of the cost of the car and/or high interest rates ranging between 10-15%.
• Short repayment periods, which are between 12 months and 36 months.
• Higher fee and costs of closing

Single-closing hard money loans are for business people who wish to acquire funds within a short time and for the purpose of refurbishing the asset with the intention of resale.

4. Home Equity Loans and HELOCs

If you already own property, you are also able to use the equity that you have against the home you already occupied for another investment. Home Equity Loans (HELs) give the borrower a single cash payment, and Home Equity Line of Credit (HELOC), just like a credit card, provides the borrower with a line of credit that they can use a certain amount anytime they want.

Pros:

• Favorable rates of interest when compared to other types of loans
• Flexible use of funds
• HEL enables one to have fixed rates for the loans while HELOC has an adjustable feature of the borrowing term.

Cons:

• Home equity is used as a form of security, thus exposing the homeowner’s home to danger.
• Flexibility through varying interest rates, HELOCs can, in turn, result in variable payment.
• It may require good credit and a good standing equity.

Using a home equity loan or a HELOC is best if you would like to add more stakes on another property today and you currently have a lot of equity in the current home you own.

5. Real Estate Crowdfunding

Real estate crowdfunding is the referral where many people contribute their money towards a given project or several projects in real estate. This is done through online portals whereby the investors can access and select the projects to invest in.

Pros:

• Lower investment minimums
• It provides an opportunity to be exposed to a wide variety of properties.
• Passive income opportunities

Cons:

• Less control on the part of the investment.
• While broadening the markets of operation, fees and cost of the platform may reduce the revenues..
• Loses all your money if the project does not go as planned

Crowdfunding is beneficial to everybody involved, especially those who wish to invest in a real estate venture without having to source for the properties or having to put down a huge sum of capital.

Conclusion

Selecting the right financing method is very important to be a successful real estate investor. Conventionally, money from banks is stable, while money from private individuals and hard money lenders is flexible and fast. Home equity loans are a form of using existing stakes, while real estate crowdfunding provides an opportunity to gain a stake passively. If you are choosing an investment you should take into account your current and foreseeable financial situation as well as characteristics of your personality.

To learn more about real estate financing, click on Back Office Admins.

These financing concepts form the foundation of better decisions and greater chances of success in real estate investment.