Being one of the investment geniuses of the current time, Warren Buffet has certainly given a decent piece of advice for our average Joe. According to a recent survey done by Trulia, the American dream of owning a home is alive, and in fact, more people are adding it to their personal American dream, at 75% for 2016. At the same time, 22% of the respondents expect getting a mortgage to become harder in 2016 among other challenges towards homeownership.
If you already own your home and have plans to invest in rental real estate, but aren’t quite sure about getting the necessary funding, this post is a goldmine of knowledge for you.
“Never depend on single income. Make investment to create a second source.” ~ Warren Buffet
How to Get Financing for Your Next Investment Property?
Conventional Real Estate Loans
If you are a beginner real estate investor, with a FICO score of above 700, conventional real estate loans are best to start with. You can visit any of the major banks or financial institutions for investment property funding, although make sure to keep your debt-to-income ratio low, as banks rely on this ratio to judge your ability for making repayments.
According to Freddie Mac’s mortgage rate survey, a 30-year fixed-rate mortgage was available at an average interest rate of 3.65%, whereas a 15-year mortgage came with an interest of 2.83%, as of February 11, 2016.
Portfolio Loans for Investment Properties
Very few national banks entertain investors with four or more financed properties, making it difficult to grow your portfolio. This is where portfolio loans come in. Portfolio loans are more or less like in-house loans of small banks, with comparatively lower regulations and large credit access. The financing instruments offered by these portfolio lenders might differ from their nationalized counterparts.
The best way to find portfolio lenders is to ask around the investor community or consult your real estate agent. Considering the limited or localized clientele of these lenders, your relationship with them will have a huge impact on credit availability and lending rates. You might have to transfer all your accounts to the local bank (portfolio lender), and don’t worry, as they have competitive products to retain their customers.
Seller financing is one of the best options in place for real estate investors. For those who don’t own a seller-financed property, it simply means that the seller has agreed to finance the property at a competitive interest rate and certain down payment. These loans usually have a short-term repayment span, and the seller can either finance the entire deal or the deficit between the value of the property and qualified mortgage loan available to the buyer. Generally, the loan is amortized over 30 years with a balloon payment in five years or so.
These deals are excellent in terms of lower regulations and higher flexibility. A lot of old couples often use it for their retirement income, and seller financing is quite common among desperate sellers. The credit requirements are likely to be lower, but be ready for a credit check run by the seller. Being a buyer, make sure that the seller owns the property, and if there is an existing mortgage, the lender has agreed to the terms of the deal. It is best to work with an experienced lawyer to process these deals smoothly.
FHA 203k Loan
If you are starting out in real estate investing with a limited capital, FHA 203k loan could be the best way to start. These loans are available for a down payment of 3.5% and you can include repair costs in the loan amount itself. However, there’s a catch. According to the current regulations, you will have to live in the property for at least one year before you can rent it out, which means it’s suitable for a buy-and-hold strategy.
A strong cash flow is a primary requisite for real estate success; however, considering the lower down payment in FHA 203k loans, maintaining a positive cash flow would be a challenge. The key is to be diligent in your calculation, considering every single dollar that you will spend to generate that cash flow.
Private Money & Real Estate Syndication
If you are a successful real estate investor planning to upscale your investment portfolio, private money is a potential option. Under private money investing, you can borrow financial resources from a private investor, friends/family/partner, against a specific interest rate or cut in the deal. One of the primary benefits of private money is the flexibility it offers, and if you have the trust of your investor, you can take calculated risks for better returns.
Real estate syndication is a concept under which several investors pool their money as well as intellectual resources to invest in a property, which is much bigger than what they can afford individually. Real estate syndication has remained in practice for the past several decades; however, these deals weren’t available to the average investor until recently with the availability of real estate crowdfunding projects.
According to the current regulations, accredited investors, those with net assets worth $1 million or more excluding their primary home, can participate in crowdfunding projects. The good news is, these regulations are likely to scale down in the upcoming years. Real estate syndication offers due protection to all the parties while the profits are shared as per the agreed-upon arrangement.
Use Retirement Funds (Solo 401k) to Invest in Real Estate
If you are an independent full-time realtor, Solo 401k retirement plan offers an excellent real estate investment opportunity. The IRS allows real estate investments through qualified retirement plans, including Solo 401k and SEP IRA.
Why Use Solo 401k for Real Estate Investing?
- Invest with tax-deferral benefits
- Roth Solo 401k offers tax-free capital gains upon the sale of the property
- Participant loan of up to $50,000 or 50% of Solo 401k account balance
- Complete investment freedom with checkbook control feature
- Finance real estate purchases with non-recourse loans, tax-free
- The ability to choose from a wide selection of investment assets, including properties, trust deeds, crowdfunding, private lending and more.
If you plan to use Solo 401k for real estate investments, make sure that capital gains or rental income go back to the Solo 401k plan only. Further, all the expenses associated with the real estate transaction should come out of the retirement plan only.