Real estate is one of the safest and most lucrative investments you can make. However, you need to spend money to make money. Investing in real estate, in particular, requires you to put down more cash compared to other forms of investing. Financing your purchase is perhaps the most difficult part of this process. Thankfully, there are different ways to make a real estate transaction successfully work if you don’t have deep pockets. The following are just some ways you can finance a real estate investment if you don’t have money on hand.
Mortgages aren’t just used to finance a personal residence purchase; you can also get one to finance an investment property. You’ll need to have money on-hand for the initial down payment and closing costs before a lender can approve your application. You also need documentation regarding your income and outstanding debts, an acceptable FICO score, and various other financial requirements. You might want to coordinate with an expert to receive advice on mortgage rates in Tempe, AZ, to see what works for you and what you need to submit.
Hard Money Loan
These types of loans are offered by professional lenders and are backed by the value of the property rather than your creditworthiness. This means that hard money loans have much lower loan-to-value ratios compared to traditional loans. They also have a much higher interest rate than other forms of financing, thus you should consider this your last resort. They’re often only used in short-term periods by more experienced investors.
These loans provide a more specialized loan package with different debt, income, and credit requirements compared to traditional mortgage lenders. This is because rather than selling mortgages to larger institutions, they keep the mortgages in-house for the duration of the loan instead. Since they’re often local financial institutions that are loaning their own money, they don’t need to meet FNMA lending guidelines, and this allows them to be more flexible.
This is one of the newest forms of financing that you can try out. Crowdfunding works by pooling funds from several different investors for large real estate projects. This allows small investors an opportunity to participate in profitable real estate projects that they may not otherwise be able to.
Private Money Loan
These loans are quite similar to hard money loans, except that they come from people who personally know the investor rather than professional lenders. Examples of people who may offer private money loans are co-workers, friends, relatives, and networking contacts. They’re a rather informal form of financing, so interest rates and terms of repayment may be flexible and reasonable.
Home equity loan
This type of loan means that you’ll be borrowing against the equity of your primary residence. This is quite risky as you can lose your home if you’re unable to make the payments, but you may receive lower mortgage payments through a cash-out refinance. Just don’t depend on the rental property income from your newest investment to be able to pay your primary mortgage. This way you can minimize the risks that come with making a home equity loan.
Although making investing in real estate has a high barrier of entry, it’s not impossible to start once you’re aware of your financing options.