By Dale Huber
Broker, DS Huber Real Estate Group
Want to start investing in real estate or flipping properties but you don’t have a bunch of cash available? You can! You will just need some sort of financing to start your venture.
The three common sources of funding for real estate investments are bank financing, hard money lending, and private lenders.
Bank Financing
The first type, bank financing, is the most common and most understood source of funding for most people. Bank financing is borrower driven, while hard money lending is deal driven. With bank financing your credit, assets, and income are the most important factors determining whether you are going to get the loan. Sure, the lender is going to get an appraisal on the property for its current value, but your situation is the most important factor.
The pros of bank financing are:
The lowest interest rates, currently
typically less the 5.5%
Low closing costs great for long term financing
The cons of bank financing for investors:
Banks are sloooow… many times too slow to allow a deal to happen in the space of time needed. Banks do not lend for renovations You must be well qualified to get financing Banks require large down payments You are limited by the number of loans you can have Banks only lend on the current value of the property
Bank financing is great if you have good credit and documentable income and are doing loans on properties you plan on holding long term.
Hard Money Loans
On the other side of the coin Hard money loans are deal driven. This means the most important factor in whether you are going to get funded or not is the how strong the deal is and the equity in the deal. Your credit and income play a very small part in you getting the loan or not.
The pros of Hard money lending are:
They can typically close in ¼ the time of bank financing They can be used to get into many types of deal Low credit requirements Will fund renovations Will lend on the post-repair value
The cons of Hard Money Lending:
Very Expensive- Rates typically start at 10% High closing costs
Hard money loans are good for getting into a deal that you couldn’t do with traditional financing. They are best used for short term deals such as flips or buy, fix, and refinance. They are great when you need to act quickly.
Private Loans
The third type of financing is private lenders. These loans are from individuals that you have a relationship with that want to put their money to work and earn higher interest rates then they can get via other investment options.
Private loans have many of the pros from both bank financing and hard money financing.
They typically:
– Have rates between 6%-8% with virtually no closing costs
– Can close very quickly C
over purchase and renovations
– Are very flexible
– Are deal driven vs credit driven, but track record and credibly is important
The biggest con to private lenders is it takes networking and time to build relationships with individuals with the capital to invest.
Once you have built a good solid relationship with a private lender they are worth gold to you and you are worth gold to them. It is one of those relationships that is truly a win-win. The relationships we have built with private lenders are invaluable to us and I’m sure all of them would say the same.
As you start to build and continue to build your real estate investment portfolio, building a relationship with a good investor friendly lender and a hard money lender until you build a network of private lenders is crucial.
Dale Huber is the Broker and Owner of DS Huber Real Estate Group,LLC. The group manages over 500 single family and multifamily units and services about 150 owners from all over the world. If you are interested in investing, property management, buying or selling, contact us at 517-507-9993.
