The Best Ways to Get Financing
The Best Ways to Get Financing!
Ways to Get the Financing for an Investment Property
So now that you got a property under contract, how do you get the financing? This is probably one of the biggest hurdles that holds people back from achieving their real estate investing dreams.
Why? Because no one is talking about it. It’s like it’s all hush hush. Well, not today ladies! I am going to share with you some of the best ways to get financing for your properties. Trust me, if it was easy then everyone would be doing it.
But, you are not everyone. You are unique and you want to learn. That is why you are here at the perfect spot. So grab a cup of coffee (or wine) and let’s get started. We’re going to talk about some of the traditional ways to finance properties, such as banks and also different creative financing techniques that you can use.
Ok, let’s just get it out of the way. Banks are still the number one way to get a mortgage for an investment property. But, they come with a price. Most traditional banks will require between 20% to 25% down for an investment property.
So that means if you’re buying a rental property for $100,000 then you might need to put a $25,000 down payment just to buy it. Yikes! If you have the money, then great. But if not, then don’t worry, gorgeous cause I have some other ways that are more attractive.
Also, banks will require good credit. So if that is not an option, then move on to number 2.
If you do go the traditional financing route, then I DO NOT recommend that you use a large institutional bank (such as PNC or Bank of America). Also, I do not recommend that you use an online brokerage (like Quicken Loans). They might look attractive and get you a fast pre-approval, but so many times they will pull the loan at the last minute (like the day before closing) and decide not to give the mortgage.
This is a pain because now the investor is out of money and time. They just paid for an appraisal, home inspection, pest inspection, etc. and the bank just says, “Nope sorry we changed our mind”. Yes, it happens ALL THE TIME!!!
Then the seller puts the house back on the market and you just lost the deal. Um, no thanks!
If you do decide to go with traditional financing, then your best bet is to use a mortgage brokerage. A lot of times, the brokerage can submit your application to multiple banks that compete to get you the best deal and interest rate.
Also, the mortgage broker usually works on a commission. They do not get paid unless the loan closes so it is in their best interest to get your loan closed. As opposed to a banker who works on a salary (not commission) and gets paid regardless if you buy the house or not.
2. Find a Partner
Ok, so you took my advice (from the previous blog posts) and went to the real estate investing meetups. Awesome! And you met some really cool investors. Yay! Why not partner with one who can mentor you along the way?
Maybe you don’t have the cash or credit, but you do have time on your side. You could trade sweat equity for real equity. In other words, you can partner with someone who has the cash or credit and offer to do work in exchange for a percentage of the profits.
An example for a house flip - you could offer to paint the houses or manage the contractors in exchange for 20% of the profits.
An example for a rental property – you could offer to manage the property, take care of the maintenance (repairs, yard work, etc.), and collect the monthly rents in exchange for a monthly fee (say 10% of the rental income).
So let’s say that you partner with an investor who has 5 rental properties all bringing in a monthly rental income of $1000 each. You could manage each property for 10% of the rents. Then, you’d be making $500 each month.
This is a great way to get your feet wet and learn the business without taking all of the risk.
3. Private Investors
Hard money lenders are in the business to lend money to real estate investors. They usually charge high fees, but some will lend you the money to buy the property and fix it up.
Most hard money lenders will have high interest rates and charge points up front. But, the good ones will just use the property as collateral and not require you to have a job or excellent credit. A lot of times the payments are interest only payments and do not go toward the principle.
These are great for fix and flip properties that you plan to sell or refinance within the next year. Then, when you sell the property (or refinance it) – you just use the proceeds to pay back the hard money lender and you keep the difference in profits.
Like a bank, they will require an appraisal and will usually lend up to a percentage of the after repair value.
There are also private investors who are just regular people (with a lot of cash) that are willing to lend their money as an investment. They will act as the bank and charge a percentage (say 10%) until you pay them back. This is a win-win situation because they are getting a much higher return on their money than a traditional savings bank or money market CD.
4. Seller Financing
This is where the person who is selling the property acts as the bank. There are multiple ways to do this, but my favorite type of seller financing is the lease option. With the lease option, you will put down a small down payment and make monthly payments to the seller.
Each month a portion of the monthly payment gets deducted from the final sale price. And in the meantime, you can control the property and rent it out or fix it up and sell it to someone else. The best part of a lease option is that you have the OPTION to buy the property, therefore you are under no obligation to buy it (such as with a land contract).
Want to learn more about creative financing? Check out my e-book for more great tips HERE
Remember That You Are Awesome!
These are all some really great ways to get financing. Do you know of any others? Feel free to share them in the comments below.
Welcome to Hey Rich Girl!
Hey girl! I'm Cynthia Cuccuini, a self taught real estate entrepreneur. I've been flipping houses, landlording (Is that even a word)? and designing homes for over 10 years. Come along the journey as I educate entrepreneurs how to invest in real estate.