Financing a real estate deal can sound overwhelming; you’ve been marketing for weeks and finally found the perfect deal, but how are you going to pay for it?
If you’re a smart investor, chances are you’ve already minded your due diligence. Investing in real estate is a great way to achieve financial freedom, but success won’t happen overnight. So before putting all your savings into financing a real estate deal for the first time, be sure you’ve dotted your I’s and crossed your T’s.
First things first, before financing a real estate deal, it’s important to get to know your credit profile. Whether you choose a traditional financing route or not, it’s smart to take a look at your credit score. Are their disputes that need to be made? Can you find areas that have room for improvement? Before making any changes to your credit (i.e. paying off collections, closing an account, etc.), it’s always best practice to speak with a professional.
If your score seems right to you, great. You’re well on your way to buying your first investment property. If, on the other hand, your score is less than impressive, no need to worry. There are creative financing options that can meet your needs, too.
Once you’ve thoroughly checked your credit, it’s time to dig into the actual numbers.
Before getting started, define your goal. Are you rehabbing the property for a big profit? Buying the property and renting it out for long-term profit? Or, are you wholesaling the property for a quick profit? Knowing your exit strategy is a must before financing a real estate deal because it will determine the process of funding your deal. Whichever approach you choose to take, be sure you understand all costs including, but not limited to, closing costs, advisory fees, contractor fees, cost of repairs, mortgage payments, etc.
Finally, organize all your financial documents (which you will show to any lender, regardless of your financing option) and assemble your team. It’s time to buy your property!
Financing A Real Estate Deal For Beginners
If you’ve found a great property and calculated a positive after repair value, there’s no doubt you will find a way to finance the deal. From private lenders to seller financing to refinancing, there are plenty of ways to get the job done. Take a look at these awesome FortuneBuilders students who took advantage of several creative financing options. Take notes, steal a few ideas, and you’ll be financing a real estate deal in no time:
Student: Samuel Beaman, Raleigh, NC
Type Of Deal: Rental
Samuel Beaman of Triangle Homes and Rehab, Inc. found this property on the MLS. He put in an offer of about 60 percent of the original asking price. When he first looked at the property, Beaman’s goal was to rehab or wholesale the property. It wasn’t until he visited the property for a second time with his Realtor that he realized the property would be best suited as a passive income property. After running the numbers, Beaman was able to find a private lender (who he met at his local REI club) to fund 100 percent of the deal. Once be purchased the property, he implemented what is known as the BRRR strategy. He bought the property, rehabbed it, rented it out, and refinanced. After the refinance, he walked away with equity in a property that produces a significant amount of monthly cash flow.
What You Can Learn From Beaman:
- Working with a real estate agent can change your perspective and alter your exit strategy. Beaman wouldn’t have turned the property into a rental without advice from his agent..
- Networking at a local REI club is a great way to meet other investors who may want to fund your future deals.
- The BRRR (buy, rehab, rent, refinance) strategy is an advanced strategy that can be used to increase profits.
Student: Brett Higson, Victoria, B.C.
Type Of Deal: Rehab
Brett Higson of Restorative Homes, LLC found this off-market property through a friend referral. Brett’s friend and his wife were looking for properties and this property wasn’t for them, so they sent it over to Brett. Brett was able to finance the property 100 percent through owner financing. The seller agreed to give them 2.5 months with his mortgage in place to complete the rehab and sell. Higson and his team also agreed to pay their property taxes for the year. At the time of finding the property, Higson initially wanted to wholesale it. After further assessment, Higson decided he wanted to add a third suite to the property and keep it as a passive income property. Ultimately, Higson and his team found a different property better suited for passive income and therefore decided to fix and flip this property as they were unable to finance two buy and holds at once.
What You Can Learn From Higson:
- You can find properties from anywhere, even if they are not listed on the MLS. Always ask friends and family members if they know of any properties in the area that you can assess.
- Owner financing is a great way to fund a deal if you have no liquid capital. When working with an untraditional lender, you have the ability to negotiate with one another until you settle upon terms that work for both parties.
- Plans can change, and you should let them. You may have an initial exit strategy in mind, but if lated you realize that a new strategy will work in your favor, it’s okay to reevaluate your plan.
Student: Nicolette Janssen, Los Angeles, CA
Type Of Deal: Rental
Janssen, of Hermosa Real Estate Solutions, and her husband found this duplex on the MLS. They were able to purchase it after Janssen refinanced her current home. They used their savings to upgrade the property to their taste and then used an FHA loan at 3.5 percent down to buy the duplex outright. They were able to take advantage of an FHA loan because they would be occupying one of the units and now their tenants pay their mortgage.
What You Can Learn From Janssen:
- Working with a spouse can be helpful because each person can take advantage of different financing or loan options.
- Purchasing a property and living in one unit while renting out the other units is a great way to pay off a mortgage.
- If applicable, using an FHA loan is a great option if you don’t have the capital for a down payment.
After reviewing these students’ stories, financing a real estate deal should no longer be too intimidating. There are a number of different creative financing strategies available to those who are dedicated to closing a successful deal.