There is no question that real estate has been one of the largest industries to grow your wealth. Almost anyone can break into the business and it will never be a dying market. There are many people who imagine it being harder than it actually is to raise capital for real estate investments.
When it comes to investing in properties, the most common question I get is how to fund deals. There are six main ways people usually go about this which are
- Bank loans
- FHA loans
- Private money loans
- Hard money loans
- Peer-to-peer loans
- Bank Loans
With today’s strong real estate market and low interest rates, this option is typically one of the most common. When applying for a bank loan, the lender will want to take a look into a couple of things before agreeing to any offer of a loan. This may include your credit history and debt-to-income ratio. The higher the income and lower the debt, the better chance you have of getting approved. As for your credit score, you want to aim for the highest credit score possible.
- FHA Loans
An FHA loan is a loan insured by the Federal Housing Administration. These loans do not require as much qualification compared to other loans being that they were created to target low-middle income borrowers. You should be able to get away with a credit score as low as 580 and only put 3.5% down. These types of loans do come with benefits but because they come with less requirements, you are required to occupy the unit, or one of the units if it is a multifamily property. If you are looking for a place to stay and rent out other units, if equipped, then this may be the perfect loan for yourself.
- Private Money Loans
Private money loans are what I’ve used to grow the majority of my real estate business. I have made tons of content around this. I utilize other people’s money (OPM) to buy real estate. A private money lender can be pretty much any person who is willing to lend you their money as a loan. Some examples of this can be a wealthy business owner, doctor, celebrity, etc.
The experience of working with a private lender will be different from that of a bank:
Speed of purchase: A private money lender can fund a deal in as little as 7-21 days
Asset-based lending: Private money lending focuses mainly on the underlying value of the property you are buying rather than your finances and credit.
Control & Profitability: You have more control over your loans since private money lenders are typically more negotiable with their terms compared to traditional banks.
Capital at Your Fingertips: I personally love to create relationships with my investors. Most of the time, I create casual relationships with my investors and it is not strictly business. This is great because it creates a relationship where we both love working with each other and we only want the best for our business. When I find a new deal and need funding, I have no problem presenting it to them right away and they don’t mind funding it whenever it’s ready. This allows us to purchase assets
- Hard Money Loans
Hard money loans offer similar opportunities for raising money. Hard money lenders are professional lenders licensed to offer loans. Just like private money lenders, hard money lenders focus more on the collateral rather than credit scores. Hard money is also relatively speedy, they can typically provide funding within 7-21 days and fund construction costs too. With all these positives come some downfalls however… Hard money loans will likely be more expensive than any traditional loan from a bank. You will really feel the interest affecting your cash flow. Most of the time that I use hard money loans, I have a plan to add value as quickly as possible so I can get into another (less expensive) loan as quickly as possible.
- Peer to Peer Loans
Peer to Peer loans are growing in popularity within the real estate world. You can connect with friends and family to fund an investment or join an online community to match you with casual investors. P2P loans are made by individuals so the interest rates and terms may vary. Most of the time the rates are lower than what banks are offering. It is also easier to qualify for these loans compared to a bank loan.
- Wholesaling Real Estate
Wholesaling real estate is generally a competitive task to accomplish consistently but once mastered, can provide you with tons of cashflow. It’s a simple concept – You find a property at a discount, go under contract, then flip it to a buyer for more than you purchased it for.
Let’s play it out in an example:
You find an off market, beaten-down house for $200,000 and go under contract with a 5% deposit. You must pay $10,000 to go under contract. Meanwhile, you know that the house would sell for $350,000 if it was put on the market.
You then look for a buyer to purchase the property at $275,000 and close on that price 30 days later.
You purchased the house for $200,000 and sold it for $275,000. The buyer purchased the house for $275,000, can renovate it and sell it for at least $350,000. This is a win-win.
Getting started in raising money can be scary so I recommend reaching out to me and asking anything you’d like. I love education people in the real estate and business world. Can’t wait to hear from you!