I used to think that only rich people could invest in real estate—that it was an occupation for the gold toilet set, not for porcelain joes like me. I didn’t really get how things worked then, though. It wasn’t until my Aunt got into the business that I learned real estate investing is open to the public, so long as you can find financing.
My Aunt was a school nurse and didn’t start investing until she retired. She had a little nest egg, sure, but she’d never even consider flying first class. That didn’t stop her, though—first a wholesale deal, then a small fix and flip, and now I swear she’s landlord to at least 10% of our town’s population. Around some time in the middle, she needed a little extra help running her operation. When I took the job, she let me in on her secret: you don’t need to be the one with the money. You just need to be the one who knows what to do with it. Financing is the engine of real estate; investors are the drivers.
That was fifteen years ago, and even though I’ve been a real estate investor in my own right for some time, I still remember what my aunt taught me. She showed me how to finance real estate investments and start making deals. I’ll share our insights on some of the most common ways here.
Knowing How to Finance Real Estate Investments is Easy
Finance, my Aunt taught me, it’s the parable of the talents: if you have money, you shouldn’t blow it on bubblegum or bury it in a hole. Instead, you should put that money to work so it makes you more money. Banks and private investors have money and are looking for ways to deploy it. As a real estate investor, you find the work.
There are three main sources of fix and flip financing available to real estate investors: a couple of traditional lending products, your self-directed IRA, and hard money loans. Here’s what they can offer you.
Traditional loans come from banks or credit unions but the ones you’ll be most interested in are not the typical mortgage. Fannie Mae Homestyle and 203(k) loans are offered by some traditional lenders. These loans can fund a real estate purchase as well as the rehab—all rolled into one loan with either a fixed or adjustable rate. This makes the funding process appear simple.
Except, most professional real estate investors don’t use them because, well, they aren’t that simple. Some of the problems that you are likely to encounter with these rehab loans for investors include:
Time crunch. These loans can take quite a while to disburse, by which time your opportunity may be off the market.
Limited project choice. If the property you want to buy needs something that the loan doesn’t cover, you’re out of luck.
Lots of oversight. In some cases, you’ll be required to only use licensed contractors, so you better not plan on doing anything yourself to save a buck. And, all rehabbing will need to be checked by the lender to ensure it’s up to specs.
Inadequate lender availability. These are specialty loans, so finding a broker who is familiar with the ins and outs of them can prove to be very challenging in some parts of the country.
I’m not going to say that getting a bank or credit union loan will prevent you from investing, but there are tools more up to the task. You can dig a hole with a stick, but it’s easier with a shovel.
Another common way to finance real estate investments is to repurpose your self-directed IRA. This wasn’t an option that was available to me at thirty-one years old when I got into the business, but it is a viable option for some. The concept is simple: you take the money you’ve saved up for your entire adult life and buy a house with it. You renovate, you sell, you reinvest. That’s if everything goes well.
If it doesn’t, then maybe you don’t get to go to Florida for your golden years. Maybe you even have to move in with your kids. Rewards are possible, but the risk here is serious. Don’t invest your retirement rashly—consult with your account’s custodian or other financial advisor before making any changes.
Additionally, IRAs are subject to a tangle of state and federal laws, regarding taxation in particular. Be sure to clear any potential deals with a certified accountant before you proceed.
Hard Money Loans
Hard money loans are intended specifically for real estate investors, unlike traditional loans and retirement accounts. These short-term private loans do come with a higher interest rate than traditional loans, but you’ll pay them off much faster—usually between six months and a year. They can also require a down payment, so you may need to have some cash to take one out. But, the benefits outweigh these drawbacks.
Here’s your Hard Money 101. Hard money loans are particularly attractive because they are an asset-based lending category. This means that the property you’re intending to purchase is used as collateral, not your credit rating. So, you don’t have to be rich to take out a hard money loan—you just have to have your eye on the right property.
Or, in fact, on the right several properties. You can take out more than one hard money loan at once and have multiple projects going at the same time. This can help your business expand as my Aunt’s did. But, it’s a good idea to start small and to make sure you have a solid exit strategy for each property before you take out a loan.
While any of these three options can be used to finance a real estate investment, hard money loans are the fastest and most effective.
Finding Real Estate Investment Funding Gets Even Easier
My Aunt used her IRA at first, but she quickly found a better way. She became an independently owned and operated HomeVestors® franchisee, then started taking advantage of hard money loans to fund her investments. As a franchisee, she gained access to a network of lenders specifically looking for real estate investment deals to fund. I followed in her footsteps, of course, and the funding resources that HomeVestors® can connect you to have only gotten better over time.
The most recent financing resource is a new lending portal that I can access on my iPad. I just plug in the property details and very quickly some of the best hard money lenders nationwide respond with competitive terms. It’s that easy.
Are you looking for ways to finance your real estate investment dreams? Contact HomeVestors® today to learn more!
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