How to Fund Your Investment Real Estate Projects

December 20, 2016 Marketing

Especially if you’re new to real estate investing, it can be challenging to secure funding for what looks like a surefire-flip or development project. Few of us have the capital on hand to purchase a likely property and undertake all of the necessary repairs ourselves. Still, the fix and flip strategy continues to grow in popularity, as do the options for financing.

After a lull following the housing crisis, the number of flip projects completed annually has been steadily rising. In a recent ATTOM Data Solutions report, Senior Vice President Daren Blomquist identified two ways that home flipping differs in 2016 versus 2006. “First, home flippers are realizing a much bigger gross ROI in 2016, averaging 49 percent in the first two quarters compared to an average gross ROI of just 27 percent in 2006. Second, while an increasing number of flippers are financing their purchases, more than two-thirds are still using cash to purchase compared to about one-third using cash to purchase back in 2006.”

As the need for financing of these projects continues to grow, flippers and investors alike should be aware of the resources available for flipping capital. Several options exist, and this opens up the market for individual investors as well as developers.

Bank Loans and Mortgage Lenders

Traditional lenders have tightened their qualification requirements since the downturn, and funding an investment property can be challenging. For most traditional loans, a down payment of 20-25% is needed to qualify for favorable rates, as is a strong credit rating (720 and up).

Here are some ways you can improve your odds of qualifying:

  • Make a down payment of at least 20%. This is necessary, since mortgage insurance will not cover investment properties.  A down payment of 25% will get you an even better rate.  For some, a personal loan to cover the down payment is a viable option.
  • Maximize your credit score. To avoid paying points on a loan, you need a credit score of 740 or better. Otherwise, lower scores mean higher interest. Most banks also require that you have a cash reserve covering 6 months of expenses.
  • Try neighborhood banks. They may be more flexible than large, national institutions, since they better understand your local market. A mortgage broker can also help you to sort through a wider range of loan products.

Private Money Loans

This sort of loan comes from people who have cash that they’re willing to invest in individual projects. These lenders can usually offer favorable rates and more flexible terms than the bank. The funds can come from friends, family, business partners, or other real estate investors, and this type of loan has several advantages.

  • What’s your credit score? Those with credit scores that won’t satisfy the bank can often find funding through private money. The minimum for this type of loan is a credit score of 620 or better, and debt-to-income ration under 35%.
  • Private Lenders may be willing to loan more. While large banks have limits on the amount they are allowed to loan, this is often not the case with private money. Banks may only be willing to loan 65% of the value of the property after repairs. On the other hand, private lenders may be willing to supply 100% of the cost for purchase and repair.
  • Are you on a deadline? With less red tape and regulation, private money loans are often finalized in a much shorter timeframe than traditional loans. This can be a major boon to house flippers, who may find great foreclosure properties at auction.

Hard Money Lending

Hard money loans are asset-based loans, so like the other examples they’re secured by real property. These loans are issued by small companies or individuals who base the loan on the value of the property being purchased rather than the borrower’s credit score.

One big drawback for hard money loans is the higher rates. They may charge interest at twice the rate of traditional lenders. Still, they are easier and faster to secure, and they can cover 100% of the purchase price.

Peer to Peer Lending

New funding opportunities are being created online, and the web is ideal for bringing investors and developers together. In addition to dramatically enlarging the pool of potential lenders, peer-to-peer (P2P) lending or crowdfunding also streamline the process to help deals happen faster.

A major advantage of this type of real estate funding for investors is that many sites allow a low minimum investment. These companies can also make investing less expensive, by eliminating the fees that are ordinarily paid to intermediaries like attorneys and accountants.

Did you know that crowdfunding websites generated $1 billion in real estate revenue last year? There are currently nearly 100 active crowdfunding sites specifically for real estate in the U.S.

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