Two are better than one, right? If the acquisition and rehab costs of an investment property are beyond your scope, you can consider bringing in an equity partner to help finance the deal.
While the partnership can be structured in many different ways, it’s typical that a partner is given an ownership percentage of the project’s return on investment. Of course, there are advantages and disadvantages of working with a partner that you’ll want to consider carefully before jumping in.
Conventional loans have strict underwriting guidelines and it can be difficult for real estate investors and the self-employed to qualify as borrowers. Many credit unions and some banks offer portfolio loans with more flexible terms and less strict qualifying standards. That makes portfolio loans an especially valuable method of real estate financing for investors.
The interest rate can be even more favorable than having a bunch of one-property loans. However, not all banks offer these and you’ll want to carefully compare terms and rates among several portfolio lenders.
If a seller owns a property outright, they may finance it for you. You make the payments to them instead of a financial institution. If the seller has a mortgage on the property, that loan must be paid back in full before title can change hands unless there’s a clause that you can assume their loan.
Every home is unique, so every owner financing agreement is unique. You make arrangements to pay the owner in installments, typically of principal and interest. The specific terms of the loan, such as the interest rate, length of the loan, and down payment are all negotiable with the seller.
Life insurance loan
If you have a permanent or whole life policy, you can borrow against the policy’s value — typically up to 90%. The insurance company uses the policy as collateral for the loan. I borrowed against the cash in my whole life policy to fund the rehab of one of my buy-and-hold properties. I was pleasantly surprised at the benefits of this type of real estate financing:
- It’s easy and quick to get funds, as there’s no underwriting process to qualify for.
- The amount borrowed doesn’t show up anywhere in your credit report, so it has no effect on your debt-to-equity ratio.
- You don’t need to make regular payments. Interest accrues each month, but there’s no repayment schedule you need to adhere to.
- The interest rate is very competitive; typically a percentage point above prime.
Real estate crowdfunding
Crowdfunding is a way of getting small amounts of capital from a large number of individuals. There are a number of crowdfunding platforms that loan money to real estate investors, including Roofstock, Patch of Land, Sharestates, Fund That Flip and LendingHome.
These platforms loan money to residential and commercial real estate rehab investors of all sizes, though some may only offer real estate financing to experienced investors. Compare different options to find out which is best for you.
Think carefully about real estate financing
As a real estate investor, you can find money to support your projects from many sources. What’s best depends on factors specific to the property and your financial situation, including the amount of money needed, your investment strategy, your exit strategy, your creditworthiness, and your experience.
While borrowed money lowers the amount of personal cash needed, you still need some cash — and that’s a good thing. Buying a home with no money down led to the housing bubble that collapsed. Investors need skin in the game, too. Becoming overleveraged means putting at risk the loss of the asset, your creditworthiness, and your reputation.