What You Need to Know About Real Estate Financing
Real estate financing is important to each and every investor either as a beginner or a savvy investor. Lack of real estate financing can be a hindrance to majority of new investors in today’s market.When an investor lacks awareness of the options they have, they are limited to the opportunities they can explore.
Read on to learn about some of the most common types of real estate financing options as well as prominent loans for real estate investing.
What is real estate financing?
Real estate financing is a term that defines an investor’s method of securing money for an awaiting real estate investment deal.
The investor secures capital from a source to either purchase a home, plot of land or any other type of real estate property
What is a real estate financing firm?
A real estate financing firm is an entity that provides loan to develop and grow real estate assets. In essence, they have a number of functions as listed below;
- To finance residential and commercial real estate.
- Conduct valuation for mortgages and properties
- Give collateral for various loan products
- Analyse for various financing and their cost
- Tax analyses that affect real estate
- Give different types of real estate financing
There are various types of real estate financing. They are also known as real estate lenders or home loans. Others call them real estate investment loans
With the increasing cost of home prices across, investors should explore various financing options that can boost buying power. This will further boost their cash flows thus increasing the returns on real estate investments
You may be asking what are options you have for real estate financing. Below are some options you can explore
Real Estate Financing Methods
There are a number of real estate financing methods. They are also commonly known as sources of finance for real estate development or real estate financing companies
Conventional Loan
The first financing method is a conventional loan. A conventional loan is a type of mortgage loan that has no backing from a government organization.
There are two main types of conventional loans;
- Conforming loans
- Non-conforming loans
Conforming loans
Conforming loans are mortgages with certain terms that meet a set of funding criteria which keep changing from time to time.
Advantages of conforming loans
- They have slightly low-interest rates and are ideal for first-time investors
- They require a low down payment which is friendly to investors
- The packaging of the loans is done well to suit the need of every investor
Non-conforming loans
Non-conforming loans are loan that do not meet the criteria set by government entities. They are known as non-conforming for two main reasons; they are too large or they have not met the set criteria by government agencies
Types of non-conforming loansF
- Loans with government backing – these are loans where the government acts as the guarantor and covers for any loss
- Holding mortgages – where the selling part gives a loan to the buyer and converts ownership of the property until repayment is done
- Hard money loan – this is a loan given to an investor in exchange of a collateral until the loan is fully paid
- Mortgages with interest only – this is where you pay the loan interest only for a set period of time
Advantages of non-conforming loans
- They have low requirements for the down payment
- The limit for the loan is usually higher
- Non-conforming loans also allow people with low and negative credit to take a loan
Portfolio loan
A portfolio loan is a type of loan where the lender initiates and holds it, they keep it in-house for the term of the loan. They cater for people with various incomes and credit score. Portfolio loans are usually flexible.
Are portfolio loans good for you? These are the benefits of a portfolio loan;
- There are no stringent restrictions in terms of property or capital requirement
- They are flexible in nature
- Managing this type of loan is easy when investing in real estate
Who can qualify for a portfolio loan?
- If you are in self employment
- Have a negative credit history due to previous history
- Anyone who does not qualify for traditional loans
Cash
Should you invest in real estate with cash? Well, this is the easiest, fastest and efficient method of investing in real estate. This makes it quick to close a real estate deal
Advantages of paying cash
- The main advantage of investing cash in real estate is that you will not pay interest
- Investing in cash is also faster and efficient
- You are also likely to get a discount when investing cash and make a profit
- A higher negotiation power is also an advantage when buying cash
Disadvantages of cash investing in real estate
- Your cash savings reduces
- You will not enjoy tax benefits because you do not have a mortgage
Delayed Financing
Delayed financing is a creative financing real estate method where you obtain a mortgage after you but a real estate property with the use of cash.
What happens is you pay the amount in cash then seek a mortgage for the same property later.
Advantages of using delayed financing
- You are able to get your money back
- Helps in your bargaining for the real estate property
- Eases your risk as an investor
Partnerships
Partnerships to finance investment property are very helpful, especially when you are unable to personally finance the property.
A partner can be used to purchase a portion of the purchase or the entire purchase, with profits typically split according to each partner’s contribution.
Hard money loan
Hard money loans are given by expert lenders. The loans have support of the value of the property, not the credit score. As a result, hard money loans have lower loan-to-value ratios than traditional loans, and typically have a higher interest rate than most other forms of financing.
Hard money loans are usually used short term by investors, perhaps while rehabbing an investment property or securing longer term financing. Though the interest rate is higher than other types of financing, it allows investors to purchase investment property, rehab it quickly, and make a profit.
Private Money Loan
Private money loans are very similar to hard money loans, and the terms are often used synonymously. The difference is that private money loans are typically from people who personally know the investor, rather than professional lenders.
Relatives, friends, co-workers, and networking contacts are examples of people who could provide a private money loan.
Because private money loans are more informal than other forms of financing, and can be from people who have an interest in the investor. The interest rates and terms of repayment can be the most attractive form of financing investment properties.
Crowdfunding
This is a new real estate financing method. It is common for investors with huge projects in real estate. They give an opportunity to other investors to contribute what they have towards the projects
Mortgages as a Real Estate Financing Method
A real estate mortgage is an agreement by which a bank, building society, etc. lends money at interest in exchange for taking title deed of a property, with the condition that the conveyance of title becomes void upon the payment of the debt.
There are two main types of mortgages
- A fixed rate mortgage – this type of mortgage has fixed interest for the loan’s duration. Once you borrow the interest does not fluctuate throughout the length of the mortgage.
- Adjustable Rate Mortgage – this type has a changing interest rate that changes periodically.
Advantages of mortgages
- It is easier to repay a mortgage because of the longer repayment duration
- The requirement to only pay a small percentage of the house or land total cost making it easier.
Disadvantages of Mortgages
- They require the borrower to have a great credit score for one to qualify
- High cost due to interest rates, insurance and legal fees
- Debt that one needs to keep paying for years.
Bottom Line
In conclusion, analyse all the available real estate financing methods and settle on the best