I trust you have heard the expression, “if you want to run a successful business, you first identify a need, fulfill that need and you have the makings for a successful business”.
You probably have also heard lots of rumblings about investing in real estate because there is so much need for rental housing. The need and now the desire to rent have recently been spawned from what started as a necessity for housing.
Over the past decade many people have been forced from their homes due to the financial crisis. I trust you all know someone who this has happened to. These people who lost homes to short sales, foreclosure or even bankruptcy suddenly became tenants.
They all had a need which investors were quick to identify and were happy to fulfill that need. These investors have found a very lucrative niche in fulfilling the needs of many new tenants. The investors also got a bonus. Many of these new tenants have repaired their financial hardships, but instead of going back into buying a home they have found a comfort level in renting.
Rental demand grows
The ability to remain transient and available to explore new job opportunities when presented in different locations made renting more comfortable. Not being tied down to a mortgage pleased others. While the aging population found comfort in not having to worry about home repairs.
For a large variety of reasons renting a home has become acceptable to many. According to Realtor Mag currently 36.4 percent of U.S households live in rental housing. Better yet, studies from the Urban Institute suggest that 2/3 of all newly formed households between 2010 and 2030 will be living in rental housing.
Single family homes top the desired rental request
For those who used to live in their own homes, they certainly wanted to maintain that independence. People like not having neighbors attached to them under the same roof.
Coming home to their own place and perhaps having their garage with a yard is very appealing to people, and now they can have this in the form of a rental.
The big need, single family home rentals
According to Builder online,80% of renters prefer to rent single family homes, however, only 70 % do, presumably because of a shortage of available and affordable housing.
In fact it is hard to pick up any article about real estate and not read about single family rentals dominating the housing market. So with a strongly identified need, you as investors are busy investing in houses to fulfill this need. Of course you want to be positioned to make purchases when you find a suitable investment, so having the funds or access to the funds is paramount.
What to buy?
Perhaps these are the top two questions I hear every day, “which is the best investment to invest in and how to best pay for it”.
Easy questions with a variety of answers. (Insert the awkward “it depends” reply here). What to buy depends on what investments you are most passionate about. All investments can afford you a great deal of success. The best investment for you is the one that coincides with your passion. Anyone telling you otherwise is simply sharing their passion in investments.
How to pay for it?
Having a number of finance vehicles at your disposal is paramount to being able to capitalize on a great investment when you find one. As you know, with so many people in the investing market now, you want to be positioned and ready to act swiftly when opportunity knocks.
When you are looking at how to finance investment properties, there are some considerations that you need to bear in mind…
- What lender will finance the type of property you want to purchase?
- How will your credit-worthiness affect your ability to get a loan?
- How many investment loans can you qualify for?
- Will having these investment loans affect my ability to get other personal loans?
This list may go on, so let’s look at some loan products and where to best utilize them. There is of course the conventional finance method of contacting your local banker, credit union or mortgage broker but most of you already know about these products. They are great for your first couple of properties but as your investment portfolio grows you want more lender options so let’s take a look at 5 investment loan products you may not have looked into yet.
5 Creative Ways To Finance Your Real Estate Investment Properties
Private Money or Angel Investor Loans
Typical use: shorter term loans such as fix and flip properties or properties you fix to hold, but need to get the house renovated first in order to qualify for a conventional lower rate loan.
Will this show up on a credit report; usually NO
There are many private investors who are in the investment business of doing private investor loans. These private investors are typically real estate investors who have had a great deal of success in real estate investments.
They understand that a tangible product is a good source to get a safe return. They are more interested in the performance ability of the investment to be able to repay the loan than they are your personal credit worthiness.
Basically they are financing the property more so than financing you!
They use the property as collateral (as any lender would) so as experienced investors themselves they know how to evaluate the financial merits of the property. Your history of repaying credit is obviously important to them, but the evaluation process in giving you a loan has more to do with the property than your credit score.
These private lenders are found all over the country. Simply google private lender and your city and you will find local sources. These investors are often called angel investors as they are easier to work with and cost less than a hard money lender. Remember a private money (angel) lender is more interested in you as a person and the qualifications you have as an investor.
Hard Money Lenders
Typical use: Most commonly short term loans such as wholesaling property or when rehabbing properties. Usually your more expensive loans but they are short term typically just a few days when wholesaling or perhaps up to 6 months when rehabbing.
Will this show up on a credit report; usually NO
These are short term loans where the acquisition costs of the property as well as the rehab work can all be rolled into one loan.
The lenders are private investors who typically have invested in large amounts of property over the years and understand the dynamics of investing.
These loans are usually more costly to acquire (up-front fees) but as they are short term loans, they can be a very lucrative way to finance a flip. Again you can google hard money lenders in your city and be connected to many sources.
Seller Financing or Seller Carry Back
Typical use: finance hard to sell homes or sellers who are investor minded and want a steady stream of passive income.
Will this show up on credit report; usually NO
This one proved to be a favorite of mine and is perhaps most investor’s favorite way to finance, the quintessential sellers financing.
These types of deals are most commonly found in economic times of hardship. When homes fail to sell due to a lack of liquidity within a normal banking market, eager sellers are willing to sell their properties to you and take installment payments of the purchase as opposed to having to wait for you to get conventional financing.
Remember of course, typically a seller has to own the property free and clear or at least have a large equity position in the property in order to be able to carry the financing for you.
My favorite deal was the purchase of a 4 unit multifamily property that was not even for sale. In fact when I inquired about buying the property, the seller stated he would keep this property in his portfolio (and I quote) “until the day I die”. This property was a cash cow for him, but I had a huge equity play in mind which I wanted to find a great property to perform this equity play on and this property was perfect for it. I eventually did buy it and it proved to be very lucrative. Read about this equity play here.
Typical use: effective when purchasing any type of property. Typically Fix and flip, buy and hold
Will this show up on a credit report; usually NO
This one is more controversial and used by seasoned investors. There are right ways and wrong ways to do these. Essentially you are buying a property that has a loan on it. You are making payments to the seller and the seller is making payments to the bank.
For example a seller may pay $500 per month for a mortgage payment. You buy from him or her and agree to pay them $600 per month. The seller profits $100 per month.
Each existing lender and or state has their own laws and rules around the subject to loans, so I always advise this agreement to be written by your attorney. You want to have provisions in the loan to insure when you make payment to the seller that indeed he makes payment to the bank or you may risk losing the house to a foreclosure if seller fails to make payment.
Careful contract writing is key here, but when done correctly allows you to buy a property with financing already in place. The common question is; why would a seller want to do this?
The typical scenario is a seller wants out quickly or is having trouble selling. As the seller will remain on the loan, it is important for the seller to understand they may not qualify for a loan until this property is sold again or refinanced.
There are times where this can reflect a win win for both buyer and seller. Knowing this product exists will allow you to find properties where this finance option may work for the seller, thus creating a win win.
Multiple Property Loans
Typical use: finance or refinance multiple properties into one commercial loan
Will this show up on credit report; depends on your structure but when it does it is just as one loan.
If you already own properties or want to buy more, you know it gets more and more difficult to get financing. Well, you will love this one!
This is a newer product for residential rental properties such as single family and properties that are 1- 4 units in size. This is a unique loan designed for the investor who wishes to acquire multiple properties.
Many residential lenders will only finance you up to 4 properties. This is a commercial product where you can literally buy as many properties as you want. The minimum is to have 5 properties and these can be properties you already own and put them onto one loan or buy multiple properties and put on one loan.
These properties can be anywhere in the U.S., and the great thing is they can also be non-recourse loans.
Coming in with very competitive rates, check out this landlord friendly loan. This loan, depending on how you structure it, may or may not be attached to your FICO credit score. It can be structured as a non-recourse loan where it is simply financing on the financial merits of the property instead of your creditworthiness.