You can find the perfect property in the perfect location, but you won’t be able to get very far without funding. How and where you fund your deals has a direct impact on everything else in the transaction. In reality, there are many different financing options that you may have not previously explored. A lot of investors think that the deal starts with the property, but it really starts with financing. You should find funding for your next deal before even looking at a property. However, finding funds is a lot easier if you know where to look. Here are a few popular sources for finding funds that even the most seasoned investors use:
1. Lender Financing: Traditional lenders are often the first place real estate investors will look to secure funds. While it is certainly more difficult closing a traditional mortgage, there are still options available. In recent months, some lenders have loosened their guidelines, as to attract more borrowers. There are even a handful of lenders who now offer stated income loan products on commercial loans. Whether this will continue or not remains to be seen, but it does appear that the landscape for investment loans is slowly changing. If you are considering going this route, you had better have all funds in your account for at least 60 days. You had also be ready to supply all of your income, including leases, and be ready for a lengthy process. If you don’t have money for the sizable down payment, there are still other options available.
2. Private Money: Asking friends and family for investing money may be uncomfortable, but it can be the thing that grows your business the most. Private money is simply using funds from a private source. This can be anyone from friends, family, co-workers or associates. Unless you have asked, you would be surprised at just how many people you know have an interest in real estate. Start by sending a letter or email to your close contacts. Explain to them that you are a real estate investor looking for a financial partner to start a relationship with. If you reach out to 100 people, odds are you will find at least five that want to discuss it with you further. It is important that you have an idea on how you will find deals and how you will run each project. You need to show that you are the expert in the field to give them the confidence to want to work with you. If you really want to find financing on your next deal, you should start with the people closest to you. It may be uncomfortable, but it could open new doors to new business. Again, private money is perhaps the best way to grow your real estate investing business.
3. Hard Money: Hard money lenders are individuals or a group of individuals that lend by their own guidelines. They work like a bank, but are not bound by strict lending rules. You may have trouble documenting your income to a bank, but a hard money lender may not be as difficult. Hard money lenders provide you with the cash to find deals at terms of their choosing. These terms often come with much higher rates and fees than a bank, but for this you are given the cash to close quickly. The number of hard money lenders has grown over the years. In most markets, you should be able to find multiple hard money options. Instead of having to come up with the down payment or rehab funds for a bank loan, a hard money lender can provide both. You still need to show that you are credit worthy and can repay the loan, but the guidelines are not nearly as strict as a bank.
4. Equity: You may have all the funds you need to close in your current portfolio. With property values in many areas on the rise, you may be able to tap into equity. A cash out loan at 70-80% of the property value can provide you with some or all of the funds you need. Taking equity may not be the best option in every situation, however. For starters, you are subject to wherever interest rates are when you apply for your loan. Secondly, you will need to pay closing costs and start your escrow account. These can put a dent in the amount of cash you are expecting. That being said, it is still a way to find the funds you need at a low interest rate. Everything is based off of the appraised value. If you think the property value has increased, equity could be a viable option for you.
5. Credit Cards: Using credit cards should only be reserved for specific transactions. These should be relatively inexpensive properties that you are confident you can get in and out of in a short period of time. It is important to check what interest rates and fees you are subject to. In the right scenario, a credit card can be a way to fund a deal, but cannot be used for every transaction.
Don’t let a lack of funds stop you from pursing your next deal. Tap into each of these options and find a way to make the deal work. If you really look for cash – more often than not – you will find it.