It’s not always easy to get investment real estate financed. This is especially true for investors looking to purchase properties that aren’t in the best condition, or for people who have trouble borrowing from traditional lenders. Luckily, conventional mortgages aren’t the only options – there are a number of other great financing sources that wise investors use every single day to purchase real estate.
1. Personal Savings
For many real estate investors, dipping into their personal savings is the absolute easiest way to pay for hard-to-fund properties. The money is yours, and you are able to invest it in whatever manner you see fit. Using your own personal savings to finance your investment property also means no waiting on paperwork or for approval.
The downside of using your own savings to fund your purchase is that you’re limiting your potential returns. The ability to utilize leverage is one of the biggest draws of real estate investing, and using your personal savings removes that benefit. Depending on the amount you have saved, using your own money could also limit your cash-on-hand.
2. Borrowing from Your 401(k)
Using 401(k) funds to purchase real estate is another popular financing alternative for investors. Just like using your personal savings, borrowing from your 401(k) doesn’t provide the return-multiplying benefits of leverage, but it does keep your available cash free.
The money in your 401(k) is more-or-less off-limits until you retire, meaning that it would be tied up in investments anyways. Luckily, you’re able to borrow from your account without paying early withdrawal fees, but there are still a couple of rules associated with doing so:
- You’re limited to borrowing no more than $50,000 at any given time. While this may be enough to fund some “fixer-uppers”, you’ll likely need to have other money available.
- The money you borrow must be paid back within five years. This isn’t a problem for most short-term projects, but investors who are focused on the buy-and-hold strategy could run into problems.
3. Refinancing Your Home
A number of people purchasing investment real estate, especially those purchasing their second property, turn to the equity built up in their primary residence as a funding source.
Borrowing against the equity you have in your home by refinancing is a great way to take advantage of the assets you already have. Because your loan is backed by established collateral, lenders are able to offer you low rates with long repayment terms.
There are two disadvantages to using your home’s equity to purchase investment real estate. First is the fact that it isn’t very scalable. If you only plan to own one investment home, this may be fine, but it isn’t too conducive to building real wealth. The second downside is that refinancing involves considerable fees and closing costs, making it expensive to use repeatedly for financing purchases.
4. Hard Money Loans
Hugely popular among established real estate investors, hard money loans are a powerful way to boost project returns through fast and affordable financing. Rather than being secured by your current assets, they use the value of your proposed investment property as collateral.
They’re easy to obtain, even on hard-to-fund properties. That’s because most traditional lenders won’t underwrite loans on properties that don’t meet their strict guidelines. Private money lenders offering hard money loans weigh each application on a case-by-case basis, and are in the business of funding the projects that other lenders won’t.
Although hard money loans come with higher interest rates than other non-conventional financing options, their short-term nature makes them valuable for investment properties you plan to purchase and quickly flip. They can also be great for buy-and-hold properties that you plan to purchase, fix up and refinance in the near future.
Getting funding for your real estate investment isn’t limited to major banks and mortgage companies. There are a plethora of great alternatives to help get nearly any property financed. While some options such as using your personal savings are simple to use, they lack the benefits of investing with other people’s money. Because of this, it’s common to find experienced and savvy investors turning to hard money loans to fulfill the majority of their needs.
If you’re looking for a hard money loan for your next real estate project, get in touch and we’ll help you get connected.