As a real estate investor, we all dream of owning many properties that pay us a great income each month. To create that future, you have to close multiple deals. These deals require money at the closing table. Without having the money to fund your deals lined up in advance, you can do everything else right and still not be able to close. Money is needed to make your deals happen.
You can find the best real estate investment opportunity in the last century and without the money to buy it, the opportunity is lost. That can turn your investing dream into a nightmare.
Today’s economic climate brings us increased lending scrutiny and tougher lending guidelines. You must have multiple options for acquiring money for your opportunities. The money is out there. You just need to know where to find it.
It’s important for a real estate investor to know their options when it comes to financing. By developing relationships with multiple lenders, you will have plenty of options to finance your deals no matter what the situation.
In this article we are going to explore 5 of the most common places to fund your deals and the characteristics of each.
5 Places to Get Money for Your Real Estate Investments:
Local Banks – If you plan on being in real estate long, it’s essential to have relationships with local banks. Local banks are a great place to get your deals financed. They will consider smaller deals than some of the national lenders. They will also consider your history as an investor when lending. They offer competitive interest rates and have more flexibility than bigger national lenders. Often times their fees and closing costs can be smaller. However, you might get shorter lock periods (fixed interest periods) or terms. Local banks will consider opportunities that are not “cookie-cutter.” They will consider properties that require repairs or have lower occupancy than national lenders will consider. Local banks loans are normally full-recourse. This means that you are personally responsible for paying back the loan.
National Financial Lenders – National lenders include organizations such as Fannie Mae or Freddie Mac. National lenders have the best rates and terms. They also offer very competitive interest rates. However, they are typically more stringent on their lending guidelines. They are also very specific to the types of properties they will lend on. They will lock your rates (give you a fixed interest rate) for 3, 5, 7, or even 10 years. National lenders will offer recourse and non-recourse loans. Non-recourse loans are loans where the loan signer is not personally liable for the loan balance. These loans are given to income producing properties. They are usually only offered on loans over $3 million. They can become recourse in cases such as fraud.
Conduit Loans – Insurance Funds, Pension Funds, and large financial companies that can be found on Wall Street can fund your deals through conduit loans. These companies pool your loan with other similar loans to create commercial mortgage backed securities. These commercial mortgage backed securities are then sold on the open market. Conduit loans are normally for larger loans above $1 million. They can compete with some of the National Financial Lenders in rates and terms. They offer both recourse and non-recourse options. Their lending guidelines can vary and they can be more flexible than traditional loans. However, they can also have higher fees associated with them including large pre-payment penalties if you pay your loan off early.
Private Money – Private money lenders consist of private individuals or companies. Private money lenders are by far the most flexible. They are flexible when it comes to your experience and property type, and they are also flexible on rates and terms. They probably won’t check your credit rating, and you may not have to meet traditional lending guidelines.
Private lenders can be used in conjunction with traditional financing or can be the only source of funds. Rates and terms are completely negotiable depending on the lender. Private money lenders consist of accredited or sophisticated investors as well as non-accredited investors. Generally speaking, a private lender can be just about anyone.
However, you need to check with your local and SEC laws and regulations for the private lending guidelines in your area. If you are going to raise large amounts of money or bring multiple investors together, you should consult an attorney. You may need further legal documentation such as a private placement memorandum.
You cannot advertise or generally solicit for private lenders. You also cannot pool lenders together without talking to an attorney first. Having said all that, private lenders can be a great way to grow your business.
Hard Money Lenders – Hard Money Lenders can be a good option for properties that need to be closed quickly or need shorter term financing. Hard money lenders can be private individuals or companies. Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. This means they will normally only loan up to 65% of the value of the property. They charge a much higher interest rate than other lenders and have some of the highest fees associated with them. They are used most commonly with opportunities that need to be closed quickly. Many investors consider them a “last resort” because of the higher fees, rates, and shorter terms.
Having the money to close your real estate transactions is extremely important to growing your business and creating the lifestyle you desire. You must have multiple options for funding your deals. Developing relationships with these five lender groups will ensure that you have the money you need to close your next real estate deal.