The Two Main Options For Real Estate Investment Financing
It should be common knowledge that real estate investments are highly profitable. Once you own property, you’re in a very powerful position. You can make money through different means, slowly building a property empire.
Author:Camilo WoodReviewer:Emmanuella SheaJul 31, 20232K Shares171.7K Views
It should be common knowledge that real estate investments are highly profitable. Once you own property, you’re in a very powerful position. You can make money through different means, slowly building a property empire.
Keeping that in mind, there’s one key barrier that stands in the way of most people and property investments: money.
Houses are extremely expensive, meaning most of us will need to take out loans to finance our real estate purchases. This is perfectly reasonable - and most loans are repaid fairly quickly, particularly if you’re flipping the house and selling it for a profit. The question is, how do you finance your real estate investments? What options are at your disposal? When you boil it down, there are only two viable options worth looking at:
Traditional Bank Loans
Loans from a bank have long been used to help people fund an investment portfolio. In the case of real estate investments, you’re looking at a mortgage loan.
This is a secured loan, meaning it requires collateral. As you’re buying a house, this will be used to secure the loan. The purpose of a mortgage is to help you cover the costs of investing in the property. Depending on the bank, you may need to make a downpayment to get the loan. This can be anywhere between 5-30% these days. The loan amount will equate to the value of the property you’re trying to buy, meaning the downpayment will be relative to that.
So, if you need a $400,000 mortgage with a 10% downpayment, you still need to save $40,000. That’s one downside to mortgages; you still require a substantial investment of your own funds. Another problem is the eligibility criteria. Your mortgage application is judged based on earnings and credit score. Most banks only let you borrow a maximum amount relative to what you earn. Also, if you have a bad credit score, it’s unlikely you’ll be approved.
Still, mortgages have some big benefits. If you’re investing in real estate for long-term goals - like renting it out - this is the better option of the two. The loan terms are much longer, so repayments are easier to manage.
Hard Money Loans
Hard money loans differ from mortgages and only really have one similarity. Like a mortgage, this is a secured loan dedicated to real estate investments. Right away, the big difference is that hard money loans are more geared toward short-term goals. As mentioned in this guide to hard money lenders, you typically get the loan, use it to buy a house, fix it up, sell the house, and repay your loan. You can also refinance the house and use your mortgage to pay off the loan, but that’s a different story for a different time.
The benefit of hard money loans is that you can get them pretty quickly. They also don’t tend to care about credit scores as much - loans are given based on the value of the property you’re buying. The lender feels safe giving you money because they know they can sell the property and claim back their funds if the worst comes to worst.
All in all, both options give you ways of accessing money to finance real estate investments. Mortgages work best when you have long-term goals while hard money loans are better suited to property flipping. Look into both options in more detail before making a decision, and always consult a financial advisor if you’re making investments.
Camilo Wood
Author
Emmanuella Shea
Reviewer
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