There are lots of different options when it comes to financing a real estate deal. We want to run through several and let you know the pros and cons of each.
1. Cash
Most people don’t have the money to purchase a property with cash as their primary residence, so this is usually for real estate investors.
If you’re an investor and you have a lot of cash, it’s best to use it as down payments on several different properties and for gap funding or monthly payments on other money sources so that you can buy more properties. Your cash should have a rate of return, and leverage is there for a reason.
2. Banks
Banks are the best option for primary residences, of course, as money from banks is cheap. However, they are not very flexible — when you are taking a loan from a bank, you need full financials, tax returns and good credit.
Banks don’t like to deal with investors, but they have started to more and more in the past few years.
3. Private investors
Private money is ideal for real estate investors, but investors are hard to find. They are most commonly used for commercial projects.
The great thing about private investors is that they are a very flexible option — you can structure your deal with them, and they can be a full partner on the project or just give you a loan.
Always pay private investors back before anyone else who you might owe.
4. Hard money
Hard money is our favorite type of financing. Hard money lenders can be called bridge lenders or private commercial lenders. It’s similar to a bank, but collateral based with high interests for short-term loans.
Most hard money lenders are flexible, very real-estate-investor friendly and know the market extremely well.
5. Creative financing
There are many types of creative financing such as subject-to financing, assumable mortgage or seller-held seconds. Creative financing can also be a hybrid of other types of financing.
Find out what else you need to know about financing the deal by watching the video below.
Chris Haddon is an entrepreneur based in Washington, D.C., a partner at Hard Money Bankers and a co-founder of REI360.net.