Funding a Real Estate Deal
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I’m Interested in Real Estate Investing but how do I find the money?
This question holds many people back from getting started in real estate investing. There are many ways to fund a real estate deal, but here are the three primary methods:
Using a bank/loan
Using a hard money lender
Getting a partner
I’ll give a brief summary of each method and take a dive into some of the ways to fund in the coming weeks, but there are plenty of books and other resources on this topic that take a much deeper dive than we will get into here. One of the resources that I’ve found incredibly helpful is Bigger Pockets, which is a great source for real estate investors and those looking to get into the space!
Bank Loans
There are various bank loans you can get to help cover the overall cost of a home. These loans include a veterans affairs (VA) loan, federal housing authority (FHA) loan, 203k loan, conventional loan, an adjustable rate mortgage (ARM), and a home equity line of credit (HELOC) if you already have a property. We’ll break down the basics of each loan below and plan on taking a deeper dive into a few of the more popular loan options in the coming weeks.
A VA loan is strictly for someone who served in the military. Features of this loan give the buyer an outstanding advantage - if you served, I highly recommend you look into it. This loan requires 0% down. Yes you read that right, no money towards the cost of the home other than closing costs and a few other fees. This loan requires you to live in the property for at least one year and can be a single family home or a property up to four units. You can use as many VA loans as possible as long as the amount you have out does not exceed the set amount you qualify for and you live in each one for at least a year.
An FHA loan requires a minimum of 3.5% down depending on your credit score. If you do not have a “good” credit score, you can use this loan with 5% down of the purchase price. Similarly to the VA loan, the FHA loan requires you to live in the property for at least one year and can be used for a single family home or a multi-family property up to four units. The FHA loan requires a stricter inspection than other conventional loans and requires the borrower to pay private mortgage insurance (PMI) for the life of the loan. There’s an arm of the FHA loan called a 203k loan that can be used to fund a rehab of a property. A 203k loan requires a strict inspection in order to determine what rehab needs to be done and there are certain contractors that conduct 203k loan specific work that need to be approved prior to any work being done. This loan is powerful because you can rehab the property and have that built into the mortgage.
The next loan we will talk about is a conventional loan. This is the standard loan that you’ve probably heard about, which generally requires 20-25% down but can sometimes be as little as 5% if you go to a small local bank. This is advantageous because it has low down payment and once the loan has 20% of the principal of the mortgage paid down, private mortgage insurance is taken off. Conventional loans have a less stringent inspection process than the FHA loan, but require more down. Most conventional loans do not require you to live in the property, although the low percent down conventional loans may require you to live in the property for a year, depending on the bank.
An adjustable rate mortgage (ARM) is a mortgage that does not have a fixed interest rate. This is not common for rookie investors because generally a bank will offer a fixed rate mortgage when you do not have a lot of debt or multiple mortgages. The terms for an ARM can be negotiated and generally have an adjustable interest rate for the life of the loan.
A home equity line of credit (HELOC) is a loan taken out from a mortgage or the appreciation of a home and can be used for anything, including the purchase of another property. This can only be used if you own another property and you have either paid enough down to take a HELOC or the house value has appreciated enough to get a loan on the property.
Hard Money Lenders
Hard money is different from a bank loan because it comes from an individual or private money lender. Generally, hard-money lenders use the asset (in this case, the property being purchased) as leverage for the loan which is commonly used by house flippers because of the usual short term nature of these loans. These loans also generally have a higher interest rate and include other fees not typically included in bank-backed loans.
Partnerships
There could be a full article strictly on partnerships, and there may be one in the future, but a brief summary of a partnership would be either someone or multiple partners provide the capital for down payment or full purchase price of the house and then the entire property is owned by the partners. Equity in the house can be divided and responsibilities of the house - whether it be a flip or buy and hold - can also be divided and agreed upon in order to keep the partnership and property maintained.
Dolla, dolla bills y’all
In closing, there is money available that will help you make the jump into real estate investing. First, we will try to help you get educated on the in’s and out’s of real estate investing and from there you should have more confidence than you previously did to begin finding deals!
Have a great rest of your week!
Brandon & Dan
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Disclosure:
The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.