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Here are the different ways you can finance your real estate acquisition:
1) All Cash
Some private investors choose to pay all cash for their investment properties. However, it’s almost always smarter to not tie all your cash up in one investment.
For example, if you have $100,000 to invest and put the lump sum down into one rental that will produce $1,000 per month, you’ll gain $12,000 per year at a 12% ROI.
On the other hand it you use it to put down a 20% down payment on FIVE similar homes, the cash flow would be approximately $300 each month per house, which is $1,500 per month each or $18,000 per year. This equates to a 18% return-on-investment – 50% better than buying just one home.
2) Conventional Mortgage
Most traditional conventional mortgages require a minimum of 5% down, but may extend to 25-30% for investment properties and 40% for foreign investors.
Conventional mortgages from financial institutions are the most common type of mortgage used by home buyers and generally provide the lowest interest rates.
3) Hard Money
“Hard money” is financing that is obtained from private business or individual for the purpose of investing in real estate. While terms and styles change often, Hard Money has several defining characteristics:
- The loan is primarily based on the value of the property.
- They have shorter term lengths (due in 6 – 36 months)
- They ask for high interest rates (8-15%)
- They ask for high loan points (fees to get the loan)
- They don’t require income or credit verification.
- The loan doesn’t show up on your credit report.
- They take only days to process.
Use hard money with caution, making sure you have multiple exit strategies in place before taking out a hard money loan. Also keep in mind that Quebec’s real estate market is not as well adapted for flipping homes at a high profit as the American market is.
4) Home Equity Loans
Some investors choose to tap into the equity in their own primary home to help finance the purchase of their investment properties. To do so, you must first have equity in your home. Banks will typically only lend up to a certain percentage of your home’s value in total.
Home equity lines and loans may have certain tax benefits, such as the ability to deduct the interest paid on that loan. Because the loan is secured by your primary residence, the interest rate on home equity loans and lines is typically very low compared to hard money or private money.
As previously discussed, real estate investment partnerships can either occur between a group of friends, or an equity partner.
Depending on the operating agreement signed by both parties, the equity partner may have an active or passive role in the property management and maintenance. The percentage return they receive on their investment is also determined in accordance to the contractual agreement.
Unlike a private lender, an equity partner does not receive an agreed upon interest rate on their money. Instead, they receive only a percentage of what the property generates. In terms of risk, this is an attractive option for many investors. Equity partners take a higher risk but potentially make much higher returns than lender do.
6) Commercial Loans
If you’re looking to buy a property other than a one to four unit residential property, your loan will be based on commercial standards. Commercial loans have higher interest rates and fees, as well as shorter terms and different qualifying standards.While residential lending, is based primarily on credit and income (or the borrower),commercial lending is more focused on the property instead.
Commercial lenders often extend a “business line of credit” to finance investments. Some investors are able to obtain a large “business line of credit,” which allows them access to cash for their real estate ventures.
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