Real estate offers many lucrative opportunities for first-time and seasoned investors, but knowing how to fund a deal requires thoughtful planning and research to find the best option for your circumstances. These are the available funding sources to consider.
Traditional Bank Loans
Individuals are more likely to consider bank loans to support real estate investments than any other funding source, but to qualify, they must:
- Have a high credit score of at least 600
- Make a down payment of at least 20%
- Show proof of income that determines debt to income ratio
- Use the property or other valuable assets as collateral
- Pay application fees
It is possible to receive funding directly from individuals recommended by your attorney, accountant, or realtor. These professionals may have other clients seeking real estate opportunities and recommend your project if they think it matches their needs. Vetting private lenders through trustworthy professionals in your existing network can reduce some of your risks, lend credibility to your project, and helps you obtain immediate access to capital. Still, these loans may come with high interest, short-term due dates, or hefty default penalities.
Online or peer-to-peer loans come from companies with minimal overhead. As a result, these lenders can offer low-interest rates and still make a profit. Online investment platforms screen borrowers and match them to lenders who usually provide unsecured loans which do not require collateral. These loans are an excellent choice for investors who need cash to purchase a property quickly.
Hard Money Loans
Hard money loans pose the most significant risks to borrowers due to high interest payments and short repayment time frames. These loans come from private investors and require the borrower to use the property they wish to purchase as collateral. Borrowers must agree to the terms of the loan before lenders finalize the funds’ transfer.
Crowdfunding is another peer-to-peer option to raise money for real estate investments. Online platforms allow borrowers to post their project details where interested investors can contribute funds to gain equity or a percentage of project returns.
Family and Friends
Financing through family and friends comes with minimal financial risk to potential investors who avoid credit checks, interest payments, and collateral requirements. When a close network of people each contribute smaller amounts toward a real estate project, their financial risk is minimal, and they have an equal stake in the property’s profitability.
Choosing suitable real estate investments requires careful consideration of your short and long-term goals, which may depend on your available funding options.