Another question that new and inexperienced real estate ask over and over is, "How do I fund my real estate deals?" Because I hear this one so frequently, I've added it to my list of real estate investing FAQ (Frequently Asked Questions). I'll try to answer it in this brief article.
There are several ways to find funding for residential real estate investments, and the primary way is with an investment property mortgage. This is the most straightforward way because you simply apply for a loan with a mortgage lender or bank like you would in any other real estate transaction.
You, the property, and the deal must all qualify according to the lender's underwriting guidelines, which basically means you need good credit, property in good condition, and cash or other equity in the deal. When these are all in line, the loan is approved and the deal moves forward to the closing.
A second type of funding is the "hard money" loan. Hard money lenders loan money based solely on the equity position in the deal, meaning if you buy at a low enough price, hard money should be available to you. Hard money loans normally are based on a percentage of the "after repaired value" of the home, and the usually include enough to buy, repair, and hold the property for a few months, until it can be resold.
Unfortunately, hard money is very costly. Often, you must pay several points just to get a hard money loan, and the interest is high, often between 10 and 15 percent. You need to take this into careful consideration before you agree to a hard money loan on an investment property.
Another, often overlooked, funding option for investment property is private loans, also called private money for real estate. Sources of private money are limited only by your imagination and include family, friends, partners, trusts, and even complete strangers. Some savvy investors create groups of private money partners they can call on when they have a good deal, paying interest on the loans and providing a security interest in the property.
The final funding source we'll cover in this article is your own, self-directed IRA. Using IRA retirement funds in a self-directed real estate investment has become very popular, and is an excellent alternative for those who have IRA funds available to them.