Raising capital is an important aspect of real estate investing. There are several strategies a real estate investor can adopt to raise capital for their projects. Hard money loans are one of the most common methods for financing real estate investment. Hard money loans are such that they are not given by traditional lenders; rather, they are offered by private individuals or lenders who often request real estate as collateral instead of the borrower's worthiness. Many real estate investors opt for head money loans over traditional mortgages or secured loans because they are quick to access, and their processes are less bureaucratic. While it might take as many as four weeks to secure a mortgage, hard money loans only take some days.
A conventional mortgage or bank loan might be a useful strategy to finance real estate investments or projects. Unlike loans administered by the Department of Veterans Affairs and the Federal Home Administration, however, regular mortgage loans are not backed by the federal government. With a regular mortgage, you might be required to make a 20 percent down payment or less of the purchase price of the property. If the property is an investment property, you might be required to make a down payment of 30 percent of the entire value of the property. Moreover, unlike the hard money loan, regular mortgage loans consider a borrower's credit history and credit score. Also, for the loan to get approved, the borrower might be required to present their list of income and assets to the lender for review.
Further, private money loans are also instrumental in funding real estate projects. Private money loans are loans that are offered by acquaintances, friends, and family members. If a person does not have family or friends with the capacity to offer them private money loans, local real estate investment networking events might link them up with a potential private money lender. Depending on the relationship existing between both parties, the terms and interest rates on private money loans tend to vary. Some terms might be extremely predatory, while some might be favorable. Most private loans are secured through a legal contract that might require the lender to foreclose the property in instances where there is a default in payment.
Seller financing, otherwise known as seller carryback, is another useful real estate financing strategy. With this strategy, the seller, instead of a bank, is in charge of the mortgage process. While traditional mortgages are usually obtained from the bank, the buyer contracts the mortgage transaction directly with the seller. Both parties, the seller and the buyer, create a promissory note stipulating the duration of payment, interest rate, and the consequences of default. A promissory note is a legally valid document promising to pay a debt to another party on a stipulated day.
Consequently, in seller financing, the buyer and seller are required to agree on the down payment percentage as well as interest and monthly payment. This strategy is usually adopted by property buyers or real estate investors who are not qualified to access traditional bank loans either due to their creditworthiness or their collateral base. With this financing strategy, real estate investors or potential homeowners are able to bypass middlemen. However, they might be required to pay a higher interest rate compared to a traditional bank loan. Also, the property is enough collateral for the seller because they can foreclose on the property in case the buyer defaults on payment.
Fix-and-flip loans are a type of real estate financing that provides short-term financing to real estate investors who intend to use the funds to acquire and remodel real estate before reselling it at a higher price. The interest rate on fixed-and-flip loans is usually dependent on the loan-to-cost (LTC), which is simply the value of a loan divided by the cost of construction.
