How To Finance Deals

One of the biggest areas that stop investors from getting started in real estate is figuring out how to finance their deals. Once you find a deal where the numbers work and everything makes sense, there are a number of different strategies and techniques that you can use to come up with the money to finance the deal. Here are several different strategies to help spark your creative juices. You can use whatever strategy you feel makes the most sense for your circumstances.

1) Credit cards – When purchasing property for a low amount, credit cards are most certainly a finance option. For example, suppose you find a property worth $50,000 that you can get into for $10,000, down payment and repairs included. You can put the $10,000 on a credit card, make the minimum payment and once the deal is closed, sell the property off and pay the credit card amount off. Even if you sold the property for as low as $30,000, you would still make almost $20,000 profit for a deal that you put none of your own money in. You can increase your profit even further by obtaining a credit card with an introductory offer of 0% interest. In this case, any payments made automatically goes toward your outstanding balance.

2) Personal Loan – Similar to a credit card, but you can typically get a much lower interest rate by taking out a personal loan. If you took out a $20,000 loan at 10% interest over 5 years, your monthly payment would work out to a little over $400 a month. Let’s say it took you a year start to finish doing a rehab deal and selling the property. For less than a $5000 total investment you can generate a huge profit of tens of thousands of dollars based on what the after repair value is for the property.

If you are looking to keep the property as a cash flow producer and your down payment and repair costs are a little less than $20,000 so you can use the borrowed money to pay the monthly payment, by renting out the property for more than the monthly payment amount, you can purchase a cash flow producing property with none of your own money simply by using a personal loan.

3) Online lending communities – Similar to personal loans, the difference is instead of borrowing money from a bank or lending institution, you borrow money from actual individuals. If you can communicate your investment vision to the lenders effectively enough that they believe you can do what you are offering to do, your request for funds will be granted.

While a bank might frown upon loaning money to rehab a property to an investor with little experience, some lenders on online communities look for people who are looking to change their lives by starting a business. The interest rates on these loans might be higher than on a personal loan. However you stand a much greater chance at getting approved for the loan even if your credit isn’t that great.

4) Friends and Family – One of the most common sources of money for new investors and business owners are friends and family. Because they know you, like you and trust you in many cases, if friends and family have the money to invest in your dream, in many cases they will loan the money out to you. In some cases, they won’t even require that you pay them back in interest. This is an incredible way to finance real estate deals if you can find enough friends and family to lend you money at favorable terms to finance your real estate deal.

5) Mortgage – For larger loans, this is one of the most common ways to finance a deal. You apply to a bank or lending institution for a mortgage note on the property. This type of loan uses the property as security. Therefore unlike the previous four loans which are secured if you fail to make the payments on this loan, you run the risk of losing the property to foreclosure. In addition, lenders have strengthened borrowing requirements, thus making it much harder to qualify for a loan. You can almost forget about getting approved for a mortgage on an investment property unless you are willing to make a down payment of at least 20%

One benefit to getting a mortgage is that if you are approved, it is one of the lowest interest rates you can get for borrowed money. Because the bank secures the loan with the house itself, the bank knows you are going to do everything you can to make sure you make that payment. You don’t want the bank to take the house back from you so you are going to in most cases make sure the mortgage loan gets paid for the property.

6) Home Equity Line of Credit – This loan is similar to a mortgage loan. However, it is typically secured by a property other than the property being purchased. However, the difference is instead of borrowing the full amount available, you can borrow as much or as little as you want. Once you pay back the amount you borrowed to bring the loan current, you can borrow as much or as little of the line of credit as you want once again.

One advantage to a home equity line of credit is the fact that the interest rates are typically even lower than getting a full blown mortgage on the property itself. Another advantage is the flexibility that this loan type offers. Depending on how much money you need for the deal, you can borrow only what you need and not necessary have to borrow a significant amount more than what you need to make the deal happen. A home equity line of credit is a very common way that investors raise money for deals.

7) Refinance – This is very similar to a mortgage; however, it is slightly different. Like a home equity line of credit, this financing strategy is typically used on another property other than the property that is being considered for purchase. With this strategy, the investor borrows money against another property by refinancing and pulling cash out of the refinance. The money gained from the refinance is used to fund the deal and the monthly mortgage payment on the refinanced property typically goes up.

There are however some cases where you can refinance a property and the monthly mortgage payment stays the same or even goes down. It all depends on the nature of the property and the nature of the refinance.

8) Money Partner – This is where you find a partner that has money to invest to put up the money on your behalf. In return you work on the logistics of the actual deal itself. You and the money partner split the profits of the deal based upon whatever the two of you are able to agree upon.

While you may be required to give up a percentage of your profit by using a money partner, the major benefit to doing so is that you can save on the costs of interest payments. A money partner is not going to charge you interest because the partner gets a cut of the profit in the deal.

9) Credit Partner – This is where you find a partner that has good credit and ask them to put up their credit by either co-signing a loan or actually getting the loan in their name. In return for their efforts as a credit partner, you agree to pay the credit partner a flat rate or a percentage of the deal depending upon what both you as the one working the deal as well as the person with the good credit can benefit from. Credit partners typically are significantly less expensive than looking for a money partner. You can typically pay a credit partner a flat rate, which they would take in many cases.

10) Hard Money Lender – These are special lenders that specialize in loaning money out to investors for the purposes of investing in real estate. These loans are typically short term loans that offer interest rates much higher than a typical mortgage or many other types of loans. The financing for these types of loans are expensive. However, for the right deal, these loans work out very well, which is why they remain being used and popular to this day.

Like a mortgage, a hard money lender typically secures the property as a guarantee that the loan is going to be re-paid. If the loan fails to be re-paid, the borrower of the hard money lender is responsible for paying the money back. Hard money lenders tend to be more flexible with their lending requirements than banks and other traditional lending institutions. They take other things into consideration such as the experience of the investor, the value of the property both current value as well as after repair value. Sometimes if the borrower doesn’t meet the requirements, a hard money lender will recommend someone to partner the deal with that does meet the requirements.
11) Sellers Financing – This is where the seller of the property you are consider buying agrees to finance the property for you. This typically occurs in a scenario where the seller owns the property free and clear and sells the property to you. The seller creates a mortgage between you and them so that you are able to close the deal.

Sellers are typically more flexible in their financing than traditional lending institutions. Terms such as no money down, interest rates lower than what banks are offering and postponed payments are all possible when you are dealing with seller financing.

The bottom line is it doesn’t matter what the deal is that you are working on. If you are willing to consider a number of financing options, there is always a way for you to get the money for the deal you are working on. In particular, if the deal is a good deal, there’s always going to be someone who will be willing to provide the money. So focus on finding the deals first. Then you will be able to use one of these many financing strategies to make your deal a reality.