Successful entrepreneurs and investors are always touting the benefits of investing in real estate. Aspiring investors quickly find out, unfortunately, that real estate investing requires a lot of money. This daunting financial barrier discourages potential investors because they think it’s necessary to fund the investment personally.
There are several ways to use other people’s money (OPM) for real estate investing, depending on the type of investment. Standard consumer financing sources like banks and mortgage brokers are good for purchasing a rental property, although you will need to cover the down payment. There are also money lenders that specialize in lending “hard money” to real estate investors for wholesaling or flipping.
- Rental Property Investment: work with standard sources for financing (i.e., banks, mortgage brokers), but you will need to cover the down payment
- Real Estate Wholesaling: primary funding comes from specialized money lenders that require a hard asset for collateral on loans
- Fix-and-Flip Investing: obtain standard financing to purchase and rehab, and supplement additional rehab costs with hard money lenders
Once you have a small amount of cash to get signatures on a contract, these are the ways you can fund your investing endeavors:
Rental Property Investing
The reason for starting with rental home buying is that you’ll be working with the more standard and widely used consumer financing sources: banks, mortgage brokers, credit unions, etc. You will need a down payment, typically at least 20%, so if you don’t have it, you can use the other investment types below to build cash to fund your first rental property deal.
Real Estate Wholesaling
Wholesaling is a short-term investment strategy that involves no repair or rehab work on the property. You’re merely using your talent and hard work to locate properties that other investors can’t or do not want to find. As a wholesaler, you can sell to a retail consumer buyer, but your average customers will be rental property buyers and fix-and-flip investors.
The primary source for funding these deals will be hard money lenders specializing in working with real estate investors. “Hard money” has come to be the name for loans that require a hard asset for collateral — in this case, the value of the home. Also called “transaction lenders,” they will fund a specified percentage of the home’s value for two closings: your purchase and the sale to your investor buyer.
For this kind of deal, you’re using the same hard money and transactional lenders, but you have to get financing for the rehab work as well as the purchase of the home. These lenders rarely loan over 65% of the value of the house. For a fix-and-flip, the current value before rehab is far less than the end value after completing the work — this is called the after repair value (also known as “ARV”). You can work with a transaction lender who will consider the ARV for the loan funding, but fees increase along with it. The good news is that many fix-and-flip investors are making lucrative deals even with these fees.
View the original article at Forbes