One of your offers, your reputation, success and ability to beat your competition will rest upon your ability to close. Top priority as a Real Estate investor is to ensure that your financing is in place BEFORE you start making on a deal when you promised to close. Sometimes that means moving in as fast as 3-5 days. Knowing and developing your financing strategy upfront is the key to moving quickly on a deal. There are a number of sources that can help finance your deals:
Your personal savings
Traditional Bank with Conventional Loan and/or Construction Loan–OPM
Hard Money Lenders–OPM
Equity Line of Credit–OPM
Business Line of Credit–OPM
OPM–The Way to Wealth
OPM stands for “OtherPeople’sMoney”, and employing strategies that maximize its use in your Real Estate Investing endeavors, will put you on the fast track to financial freedom. That’s whythe first bullet above, your personal savings, is the least popular way of buying properties for successful Real Estate Investors. There may be times when you may need to tap your personal funds to assist with a property, however; in general, acquisitions should be made with OPM. Let’s take a closer look at these various forms of OPM.
Traditional Bank – In many cases a traditional bank will finance the acquisition of investment properties. Although their criterion for lending can be quite stringent, there area number of banks that are more lenient than others. If you are purchasing a property that is immediately habitable, with the need for only minor repairs, you may be able to get a conventional loan, with no down payment, if youintend to live in it. When it comes to lending dollars for a property that is in need of rehab before it is habitable, banks offer construction loans. Typically the bank will lend the money for purchase and then will establish a separate construction loan that will cover the costs of the repairs. Often times they will require an inspection by a bank affiliated inspector, so that they can get an accurate assessment of the work that is necessary. Then they will ask that you create a Draw Schedule, which outlines the different points that you will pay your licensed contractor. They will then dole out the funds based on your Draw Schedule and confirmation by their inspector that the work was done.
Traditional Bank Characteristics
Requires strong credit
Potentially slower closing time (30 days or more)
Requires Bank Appraisal
Offers options of Full-Doc, Stated. Or No Doc–All of which will impact the interestrate
Offers variety of loan types (ARMs, Fixed Rate, Interest Only)
Hard Money Lenders
Hard Money lenders are typically individuals with an abundance of cash who lend money to others to purchase properties. A hard money lender, provides a lot more flexibility than banks and rarely are concerned with whether the property is habitable or not. They are willing to take on risks that banks typically will avoid, however, as a trade-off the interest rates and points on loans from hard money lenders can be significantly higher than from other forms of lenders. Interest rates may be as high as 14% with upwards of 5 points or more (depending on the circumstances). Just like banks hard money lenders will also help finance the rehab of a property. Before turning to a hard money lender it is very important to understand the terms and to be clear onyour exit strategy. With such high rates, you will want to refinance out of their loan as soon as possible.
Hard Money Lender Characteristics
Credit Issues are OK because the cost of the risk is added to the cost of the loan
Line of credit
Line of credit is one of the more popular way in which successful Real Estate investors do their deals. Equity Lines of Credit (ELOC) on property that you own, may be the fastest and easiest way to get financing for your Real Estate investing endeavors. An Equity Line of Credit is basically a tap of the equity in a property. At some point a property appreciates to more than what it was purchased for, and the difference is equity.
Equity at rest is of little to no benefit for a property owner, whereas equity at work buying other properties is a surefire way to wealth. The typical cycle with an ELOC is to use it to buy or rehab a property (or both), once the property has been repaired then you refinance, bringing your ELOC back to $0, and then tap the newest property’sequity and use it to purchase your next acquisition. Successful Real Estate investors repeat this cycle over and over, until they have achieved their financial goal. A business line of credit (BLOC) is another good source of cash. If your business has been operating for 2 years or more, with an Employer Identification Number (EIN) to prove it, and you have a good credit score, you open up a BLOC for your business. Depending on your creditworthiness and your business income, a BLOC can bring a welcome injection of cash for your rehab work, and your monthly expenses. Lines of Credit Characteristics
Good credit is important
The amount is based on the equity in the property
Allows Flexibility- Can make purchases as high as the limit withoutBank’s pre-approval
Interest accrued may be tax-deductible
Good Credit is important
Must have established business (at least 2 years)
Based on personal credit and business income
Allows Flexibility – Can use funds without any pre-approvals
There are a number of individuals out there who want to invest in Real Estate, but are too afraid to take on the risks involved. They want all the glory without the work, and that’s where you come in. These investors prefer to give their money to a trustworthy, experienced investor who can invest their dollars and give them more than the standard market rate of 4%-5% on their dollar. Many Real Estate investors use this as a method to use OPM without an impact on their personal credit. In this case they are simply pooling together OPM with a promise of a above market return (8% – 10%) in a relatively short period of time. Because of the legal implications (securities fraud) involved with this strategy it is suggested that you thoroughly do your due diligence before soliciting funds from individuals to fund your deals. There’s no fun in making deals if you’re behind bars.
Seller financing is the true jewel for a Real Estate Investor. Seller financing is where the seller allows you as the buyer to pay them directly for the purchase of a property. This means that as the buyer you don’t have to worry about finding outside financing to purchase the property, which means one less debt on your credit. In some cases the seller may own the property out-right, and with a bit of negotiation, they are willing to take back a loan, so that you can purchase the property. This is a great tactic for Real Estate investors that may have difficulty getting other forms of financing because of their credit history. In other instances the seller may still have a loan on the property, however, they are willing to sell the property subject to: which means that the loan stays in their name, but you pay the bill every month, for an agreed, pre-determined amount of time.
Seller Financing Characteristics
Protects your credit
Credit issues are OK
Requires strong negotiation skills
Allows you to offer a higher price that if it were financed via other means