Types of Financing
The following are the main types of financing that are available for real estate investments:
Bank Loans: Bank loans for real estate investing typically have a duration of 15 years or 30 years for residential loans, and 10 years or 15 years for commercial loans. To qualify for a bank loan, you’ll need good credit and the ability to show that you can repay the principal and interest.
Mortgages: Mortgages are available in a variety of configurations, from traditional FHA or VA mortgages to jumbo loans and ARMs.
Home Equity Line of Credit: If you have equity in your primary residence and good credit, you can borrow against your home by taking out a home equity line of credit.
Personal Savings: You can use your personal savings as a down payment or to finance the entire purchase of a residential or commercial property.
IRA / 401 K: If you have adequate money in your IRA, you can create a self-directed IRA LLC and purchase property with your IRA funds. If you have a 401K, you may be able to borrow against it to finance a real estate investment.
Investors: If you find a great property, but don’t have the financial means (down payment and ability to borrow) to swing the deal, you can find investors to go in on the purchase with you. These can be family members, friends, or investors that you meet through real estate investment clubs.
Hard Money Lenders: Hard money lenders (individuals and companies) will lend in risky situations that banks and mortgage companies won’t touch. The trade-off is a shorter term on the loan (typically only 1-3 years) and higher interest rates.
Zero Down Investing: Zero down investing is still possible through low-income FHA loan programs and owner financing.
Private Lenders: Private lending/financing comes from a real estate investor and/or someone you know personally. Many times that lender is investing from their self-directed IRA or 401k.
When considering which type of financing is best for your real estate investing, consider:
- the length of the loan (e.g. 1 year, 5 years, 30 years)
- the monthly payment (principal, interest, taxes, and insurance)
- the annual interest rate
- the points you’ll pay to close the loan (each point is 1% of the amount of the loan)
- the qualifying criteria
Want to learn more about types of financing? Attend a free real estate investing seminar! Click here to learn more about financing for real estate investing.
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