Believe it or not, finding the money is not the most difficult part of investing. Finding the deal is. Once you have located a great deal, all you have to is shop it around to various lenders and potential partners. The money will come! Below is a brief list of a few different options for funding your deals.
- Private Money
Private Money is one of the best ways to fund your projects. It can come from almost anywhere. You can seek private money from your friends or family members, business associates, colleagues, etc. People are always thinking about how to make their money grow, so what better way than to invest in one of your deals! Go to them with the deal, explain what you are going to do with their money, tell them how their investment is secured, how much you will need, and ask them to tell you what interest they would like to earn. Don’t just throw out a rate you think they would be happy with. You may be surprised that the interest they request is lower than you would have paid.
- Hard Money
Another type of funding for your deals is Hard Money. Most hard money lenders do not check your credit history or require a down payment. Also, hard money lenders typically lend up to 60 to 70 percent of the After Repair Value (ARV) of the property in which you are renovating.
Hard money interest rates are usually between 10 to 18 percent with added points in the range of 2 to 6. Hard money loans are costly, but they are there for you when you have nowhere else to turn to get the funding needed for your projects. It is better to get a longer term hard money loan rather than a shorter term, because once again, you never know what kind of surprises may arise and it is better to have more time than less time to rehab your property. If you run out of time, those points will add up and your loan will balloon.
Also, hard money loans usually come with fees. There are processing fees, draw inspection fees, wire fees, and other fees. Some hard money lenders require you to use your own money for your first draw. You will not receive that money back until the end of the project. Keep in mind that hard money loans are only used toward the purchase and repair of the property. They are not used for closing costs or taxes, title fees, or insurance. When obtaining a hard money loan, you will still have to seek funds from another source.
- Bank Financing
Bank financing may be another option for funding. Most banking institutions will offer a loan with less interest rates than a hard money loan. However, when going through a bank to receive a loan, you will need a good credit history and a down payment. Most banks require a 20% down payment of the purchase price of the property in which you are investing. Also, if you are purchasing the property from a wholesaler, most banking institutions will not cover the wholesale fee.
Some banks will provide you with a line of credit that you can draw from for each house. They usually need to underwrite each project with its own appraisal, but at least you have a set amount of credit available that you know you can use for future projects. The best place to search for investor friendly banks is through your local and regional banks. The smaller banks tend to keep their mortgage loans in-house and do not have the same kind of underwriting requirements that larger banks have. It’s also much easier to meet with the decision maker at a smaller bank.
- Home Equity Line of Credit
If you have equity in your house or rental property, this is a great strategy to use to fund your deals. The interest rates on home equity lines of credit are typically pretty low. You do not have to pay the points and fees to access the cash like you do for hard money. You will also save the Mortgage Recordation tax you would normally pay when using private or hard money lenders.
- Credit Partner
If your credit is not so great, find someone that would like to partner with you who has great credit! It’s worth splitting a bit of the deal if you can get good financing. There are plenty of people out there with great credit and good jobs who would love to invest in real estate but do not have the time. Network at your local real estate investors association to find credit partners.
- Debt Free Investing
This is a variation of the private lender strategy where you partner with your lender splitting the deal 50/50. There is no promissory note or mortgage involved. Since you are not borrowing cash or having to make any payments, it takes a lot of pressure off of you. The lender’s fee is just a percentage of the deal after the project is complete. If a deal goes bad for whatever reason, you are in a much better position if there is no debt obligation involved.
Crowdfunding is a newer option for funding. There are multiple sites starting up like patchofland.com, peerstreet.com and others that will allow you to create a profile, invite your network to join your profile, and raise the cash you would need to do the deal. Some of these crowdfunding sites have developed a robust internal network of investors ready to fund your deals.
The methods discussed above are great ways to fund your deals. You might find that no one way of funding will generate all of the money needed for the entire project and therefore you may want to use several different methods to obtain the money needed. Happy investing!