The financial commitments required in real estate investing can vary in size and scope, from purchasing a handful of shares in a real estate investment trust (REIT) or real estate syndicate to purchasing a house or office building. The latter type of real estate investment generally requires a substantial outlay of cash. Very few individual investors have that kind of money on hand, but a prudent investor should always explore ways to avoid putting their own money at risk. Numerous resources exist for financing real estate investment purchases and projects. Real estate investors should carefully review their options. Identifying the best type of financing depends on the property or project, the resources available to the investor, and the investor’s goals.
Types of Real Estate Investments
The best means of financing a particular investment depends on the nature of both the property and the project. Investors looking to purchase residential property, either to lease or to re-sell, can look into various types of mortgage loans. State and federal laws, intended to protect consumers from fraudulent and deceptive loan practices, may regulate many of these types of loans.
Commercial real estate investors may have more flexibility in the options available to them. Real estate development projects, in which an investor purchases property for the purpose of making substantial improvements, may require a more extensive financing strategy that combines several types of loans.
A typical mortgage loan provides a buyer with a portion of the total purchase price of a home. The buyer usually has to put some cash down, and the lender provides the rest. Loans for residential real estate investors operate about the same way. Lenders look at the investor’s financial information, including their credit score, and will also want to see a business plan. The investor must sign a promissory note setting the terms for repayment of the loan amount. The lender will have a lien on the property to protect its own investment.
Some types of mortgage loans are not generally available for investors. Loans insured by the Federal Housing Administration (FHA), for example, are only available to buyers who intend to use the property as their residence. FHA program rules, however, allow the use of FHA loans to buy properties with up to four separate units, like a duplex, triplex, or quadruplex. If an investor intends to live in one unit and rent the others, they may be able to take advantage of the FHA program’s benefits.
Banks are not the only source of financing for real estate investments. Investors can also look to private lenders, including:
– Friends and family: This is not always an ideal financing source, but it can work under the right circumstances.
– Hard money lenders: This is an informal term that refers to private individuals or businesses that lend money for investment purposes. Hard money loans typically involve higher interest rates, but they often move much faster than bank loans.
– Owner financing: The seller of the investment property may agree to a deal in which the investor pays the purchase price over time. Investors should approach this sort of deal carefully.
Instead of borrowing money, a group of investors can enter into a partnership or joint venture that pools each partner’s contribution. This type of arrangement could trigger securities regulations under certain circumstances. This could take the form of real-estate syndicates, which we discuss extensively in other articles.
More Blog Posts:
What California Real Estate Investors Should Know About Commercial Leases, Titles and Deeds, August 10, 2017
Foreclosure Sales and California Real Estate Investors, Titles and Deeds, July 31, 2017
What California Real Estate Investors Should Know About Residential Leases, Titles and Deeds, July 26, 2017