When I first started out as a real estate investor, I found the number of financing options out there to be overwhelming. I would spend months researching lenders and comparing terms, and I didn’t have anyone to turn to for advice on financing my first purchase. The hassle of finding a lender and getting approval for financing with terms that would allow me to get the most out of my investment was almost enough to make me give up on my dream.

Then I met an investor who’d bought and sold hundreds of properties and had experience with every imaginable form of real estate financing. She compared 203(k) loans and HomeStyle loans, walked me through the pros and cons of investing in self-directed IRA funds in real estate, and explained hard money lending in terms I could understand. Without her help, I might never have found the financing I needed to invest in my first property and launch my real estate investment business.

If you don’t have someone to walk you through your financing options, you’re in the right place. I wanted to ensure new real estate investors didn’t feel as overwhelmed as I did, so I wrote down a few tips for how to get financing for your real estate investment with less hassle. I will discuss three of the most popular financing options and discuss the pros and cons of each, helping you make the best decision to get started.

Learn How To Get Financing for a Real Estate Investment

There are many ways to get financing for a real estate investment but not all of them will apply to your unique situation. It’s best to weigh your options and choose the type of financing that fits into your real estate investment strategy.  

Self-Directed IRAs

Self-directed IRAs allow you to allocate your retirement funds to investments outside of the typical stocks, bonds, and mutual funds. This means you can use your self-directed IRA to fund a real estate investment instead of getting a loan from a bank or other lender.

One of the advantages of using a self-directed IRA to fund your investment is that you don’t need to wait for approval on a loan before investing in a property. You can also use your IRA for other types of real estate investing, like purchasing real estate notes or investing in rental properties, which you can’t do with traditional real estate loans. It’s also fairly easy to get started by rolling your old 401k or Roth IRA into a self-directed IRA, though you should make sure you find a custodian for your account who will give you advice and keep an eye on your investments for you.

The risk with using self-directed IRAs for real estate investing is that you’re using your own savings, so if you make a mistake or a bad investment, you could potentially lose your whole retirement fund. While your IRA is tied up in a real estate investment, you might limit your ability to leverage other financing resources like hard money loans because you can’t offer a personal guarantee through an IRA. For these reasons, you should consult with a financial advisor who can explore financing based on your investment experience.

Traditional Loans

There are two types of traditional loans offered by banks and credit unions that may be beneficial: FHA 203(k) loans and Fannie Mae HomeStyle loans. These loans provide the funds for both purchasing and renovating a home with a fixed or adjustable interest rate.

FHA 203(k) loans can be ideal for beginners because of their low down payments—as low as 3.5%—and because you can borrow up to the mortgage limit for the area you’re investing in. However, you only have six months to get all of your renovations done, and the house must meet certain energy efficiency requirements once the renovations are complete. You also must live in the house for 12 months before you can sell it. These limits and requirements make it difficult to quickly flip homes or invest in multiple properties.

Fannie Mae HomeStyle loans also have fairly low down payments, and they lend up to 85% of the home’s post-renovation value. There aren’t any restrictions on what types of renovations you can do as long as they add value to the property. However, HomeStyle loans require that you use licensed and insured contractors, which means you can’t save money by doing renovations on your own (unless you’re a licensed contractor). You also have to submit all plans and documentation to the lender for approval and undergo regular inspections during the renovations. Despite all this red tape, you only have 12 months to complete your renovations.

Overall, traditional loans may be best for new real estate investors who lack the experience to safely risk their own money and like the safety of institutional oversight. Traditional loans typically take a while to disburse funds which limits your ability to quickly buy and sell properties. You’ll also need great credit to take advantage of the low-interest rates, which can be discouraging for someone who’s had bad financial luck in the past.

Hard Money Loans

Hard money loans are provided by private lenders and use the value of the property being bought as security for the loan. This means instead of using your credit score, income, and tax returns to determine your approval for a loan, hard money lenders use the property you’re purchasing as collateral and determine your eligibility based on how much they think your investment is worth.

Hard money loans are a convenient way to finance real estate purchases and renovations because you get the money quickly, sometimes within a few days of applying. Hard money lenders are known to finance riskier investments, and they’re not required to adhere to the Dodd-Frank Act. Hard money lenders generally allow interest-only payments at the beginning of a project, meaning you can free up some of that money to fund renovation and permitting costs. Also, hard money loans usually don’t have a penalty for early repayment, allowing you to quickly move on to your next project.

One of the disadvantages of hard money loans can be the high out-of-pocket costs, with down payments that are significantly higher than conventional loans. The interest rates tend to be high as well, sometimes as high as 20%. Also, while approval for a hard money loan doesn’t require good credit or high net worth, you do generally need to prove you have experience with real estate investment, which is why many investors create a credibility kit to show potential lenders.

HomeVestors Makes It Easier to Finance Your Investments

Becoming an independently owned and operated HomeVestors® franchisee made it easier for me to take my business to the next level because I joined a network of real estate investors who offered advice and feedback about financing my investments and recommended lenders (as well as contractors, appraisers, and other vendors) I could trust.

If you become a HomeVestors® franchisee, you’ll not only benefit from a large network of experienced investors, you’ll also gain access to a suite of investing tools to help you convert leads, communicate with clients, and manage bills and payments. The UGVilleSM platform even offers a sophisticated proprietary lending portal to connect you with reputable hard money lenders and compare the terms and conditions for every loan they offer.

If you’re interested in joining the HomeVestors® network and becoming an independent franchisee, request information from HomeVestors® today!

Each franchise office is independently owned and operated.