Real Estate Financing Options

​Investors looking to purchase investment properties have several financing options. The type of financing you choose will significantly impact your bottom line. Understanding what each option entails ensures you leverage the best financing for your investment goals.

The most popular real estate finance is conventional bank loans. It is structured such that the income from the property services the loan. Lenders evaluate your assets, income, credit score, and credit history to determine your ability to repay your debt. Your financial history and status will also dictate your interest rate. Next, you put down a percentage of the property’s sale price.

The main advantage of conventional loans is that they typically have relatively lower interest rates. What’s more, you get a 15 to 30-year repayment period. Traditional loans are, however, hard to qualify for. Strict pre-approval requirements like lower debt-to-income ratio and higher credit score, not to mention considerable paperwork, can be off-putting.

Then there’s hard money loans. They’re short-term loans by individuals or private companies. Unlike traditional loans, where you pay back over years, repayment for a hard money loan is prompt and in full.

Hard money financing is ideal for house flipping - purchasing a house for resale, not renting. It’s also ideal if your credit score or credit isn’t all that impressive, as hard money lenders focus on the property’s value and whether the estimated after-repair value can offset the loan. They, however, come with interest rates of up to 18 percent or more depending on the lender and repayment period.

The third real estate finance option is to tap into your home equity. Home equity is the portion of your property that you own outright – equity you get as soon you make a down payment.

The main advantage of home equity is access to lump sum cash. You can borrow up to 80 percent of your home’s equity to acquire or renovate an investment property. Also, home equity interest rates are relatively low because your primary residence serves as security.

Even so, home equity interest rates tend to be variable, which may complicate financial planning. Another major drawback is that you can only access loans up to the value of the available equity.

Another option is commercial loans. They are popular among investors looking to invest in commercial real estate, such as mixed-use, industrial, and multi-family residential properties. Commercial loans have shorter repayment periods than residential loans, ranging from five to 20 years.

Commercial loans are ideal for financing huge projects due to their higher borrowing limits. Also, interest rates on such loans tend to be competitive, especially for investors with solid credit history and a viable business plan. Unfortunately, commercial loans are hard to qualify for due to extensive documentation and large down payment requirements that only wealthy investors can meet.

Another option is to get a loan from friends or family, also known as a private money loan. You can also look for potential financiers at local real estate events. How favorable the terms are will depend on the type of relationship you have with the lender. 

Private money loans are devoid of the documentation requirements associated with typical loans. As such, they are ideal for taking advantage of short-term investment opportunities. Also, private money loan terms are less rigid. However, they may come with high interest. Moreover, such arrangements are not regulated, meaning little to no protection.

You may take two different loans simultaneously. For example, you acquire a property using a hard money loan and then pay it off with a conventional loan, home equity loan, or private money loan. 

Real estate financing allows investors to acquire property without paying in full. The trick is to find an option that benefits you, not one that makes you work for your lender. Even so, owning property isn’t the only way to invest in real estate. For example, with private equity real estate, you invest via a fund. Many other investment options allow for such an arrangement.

KC Kronbach

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