When you need real estate investor financing, there are basically four types. Although some would argue there are other types, those are customarily just derivatives of these four; traditional lenders, equity partners, portfolio lenders, or hard money lenders. We will discuss the benefits and drawbacks of each.
#1 – Traditional Lenders for Real Estate Investor Financing
The traditional lenders such as Fannie Mae, Freddie Mac, and other large banking institutions usually have the longest terms and lowest interest rates of the four types of real estate investor financing. However, they also have some of the most stringent creditworthiness checks and the most drawbacks of the four.
To secure a loan from a traditional lender, you will need high credit scores, usually mid-to-high 700s, a high income, and a low asset to debt ratio to qualify. Also, it may take a long time to get approved. Since the “great recession” of 2008, it is very tough to qualify for home loans.
Also, large banking institutions and government-backed lenders will not include the expense of renovations into the loan amount. The current loan-to-value (LTV), minus the down payment, usually 20 percent, is all you will ordinarily get. In addition, there are a fixed number of loans you can have open at one time, so if a property doesn’t sell right away, it could cause delays in getting financing for another project.
It’s fine if you have the cash on hand to make the renovations, but most traditional lenders require that the house is “livable,” meaning some repairs will have to get done before closing. Therefore, it is wise not to do any demolitions before securing the property loan from traditional lenders.
#2 – Equity Partners
The most valuable benefit of an equity partner is there are no creditworthiness conditions attached to getting the money. These investors are often friends or family who put up the money for a percentage of the profit. In most cases, you can expect no help from these “partners” unless there is an agreement beforehand for them to handle a specific part of the project. Otherwise, they just put up the money and wait until you finish the work to take their portion of the profit.
A significant drawback to this type of real estate investor financing could be the cost. Most equity partners insist on a 50/50 split of the profits so, in the end, it might cost more than most other means of funding.
Another drawback could be the danger of a rift in the relationship. If the thing doesn’t go as planned, or if the partner wants to inject their ideas into the project it could cause issues. Especially, if the partner’s adamant suggestion of a fireplace cuts too deeply into the profits, it could cause hard feelings.
#3 – Portfolio Lenders
The portfolio lender is ordinarily a small bank or investor with at least a little knowledge about real estate investing. These banks will not have you meet the same criteria for real estate investor financing as bigger banks or government-backed agencies. And, they may even lend you 90 percent of the LTV. Though, they may still insist that you have an excellent asset to debt ratio, an investment portfolio, or cash reserves to secure the loan because most are not interested in foreclosing and having to deal with the property after foreclosure.
Don’t expect to get those same low-interest rates and long-term mortgages you would get from traditional lenders though. You will likely pay double-digit interest rates and agree to very short repayment terms, such as six months to a year. And, the lender will possibly scrutinize your renovation plans thoroughly.
#4 – Hard Money Lenders
A hard money loan is the most accessible of the four real estate investor financing types. There are no creditworthiness pre-conditions, and these loans can usually be approved within a few days. Hard money lenders care more about the repaired value of the property, which is why they are referred to as hard money lenders, the “hard” asset being the property, which will secure the loan.
These lenders can often authorize up to 100 percent of the After-Repair Value (ARV) because it is, for the most part, theirs or a group of investors money, who are not as strictly government regulated.
The drawbacks are basically the same as portfolio lenders, with high interest, and short-term loans, except that the hard money lender will probably not delve into the refurbishing plan but trust the appraisers ARV.
Red Door Funding at(832) 539-1099
Red Door Funding is a group of hard money lenders who arrange loans to “fix and flip” properties or renovate and rent projects. They make real estate investor financing possible even for individuals with no credit or bad credit. The investors’ reputation for revitalizing properties for resale is more relevant than their debt to asset ratio. Call the skilled hard money lenders at Red Door Funding. Complete an online application here or email us your questions, email@example.com.
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