Financial leverage is one of the most important tools for real estate investors. What types of credit and investment property loans are available now?
The Importance of Financial Leverage for Property Investors
Even if you never plan to borrow a dime to build your investment portfolio or real estate business, it is vital to know what options are out there.
If for no other reason, you need to be a master of this area to understand your competition, and ability to resell assets. Cash flow shortages are also the number one killer of all businesses and entrepreneurs. Things notoriously cost more than you expect, and unexpected expenses will frequently pop up at the worst moments. So, it is just smart, business 101 basics to know your finance options in case of an emergency.
Others reading this will understand and appreciate the importance and value in leverage for reducing risk and accelerating wealth and passive income growth. That may be upfront for acquiring properties, for fixing them up, covering cash flow needs or recouping capital as part of an exit or expansion plan. Nothing will trip you up and bankrupt you faster than failing to know what you can do for financing and not.
Check out these nine solutions and types of investment property loans…
1. Transactional Funding
Transactional funding is the fastest and easiest way for most real estate investors to finance wholesale house deals and house flips. It is also one of the least well-known forms of real estate funding.
Transactional funding is a specialized type of financing for real estate. It is best known for being easy to qualify for and fast for funding deals. This is typically a very short term lending solution for those who plan to be in, out and paid on real estate deals quickly.
Many might think transactional funding is too good to be true, until they use it for themselves. Though there is one major quirk investors need to know about.
The term ‘transactional funding’ was probably unheard of by most until 2008. It is one of the most exciting and positive things to have come out of the housing and financial crises. Since then several dedicated transactional funding lenders have popped up, and have become invaluable to real estate investors, the industry and the economy.
Before that, this type of funding was really exclusively available to connected real estate investors who knew private lenders personally and individuals with lots of cash to loan. Those were the investors who were doing fast flips and wholesale deals at great volumes. They could flip hot properties for $100,000 gross profits, all month long. In, out and paid.
Transactional Funding for Wholesaling Houses
Without funding, real estate wholesalers have had two main choices:
- Pay cash and resell quickly
- Assign the contract for an assignment fee
Not every investor has the cash. Whatever cash they do have limits them on the amount of deals they can do. Assigning real estate contracts can be great. However, it can limit the potential profit. It also puts investors are great risk of losing deals.
In the past some investors double closed real estate deals using their end buyers’ funds. That is now illegal in many jurisdictions. You must now assign and flip the contract, or have two separate closings with their own funds. Transactional funding solves this by giving investors the cash they need to close on the buy side, and allowing them to resell for a profit in a separate closing.
Why Transactional Funding
Transactional funding enables investors to conduct legal back to back closings, while protecting the privacy of the deal with the original seller, and preventing either seller or end buyer from being tempted to try to cut out the investor. That means you can also make a lot more on these deals than with assignments. Many end buyers, including investors are going to balk at you trying to make $50k or $100k on an assignment. They might be okay with $5,000, but why leave so much money on the table if you don’t have to?
Transactional lenders typically are not going to require full title reports, insurance or appraisals either. That cuts transactional costs, leaving more profit, and speeding up the process. Transactional lenders normally claim to fund transactions in a matter of days too.
Transactional funding normally provides 100% financing, and virtually no personal qualifying. You don’t need to have your credit checked, prove your job or income, assets or worry about debt-to-income ratios. That means a lot less headaches, and less risk of the deal falling apart, or damage to personal credit.
The one big catch is that you need to have an end buyer already lined up. You have to prove you have a cash buyer or a buyer who qualifies for financing. Be sure your end buyer and their mortgage broker are aware this is a flip.
2. Private Lending
Private money lenders can be far more flexible than any other funding source, with openly negotiable terms. What they want will all depend on what you can work out.
Private money lending is becoming much more popular than it used to be, thanks to more awareness of the opportunity, highly respected publications touting its benefits, and changes in the economy and financial markets. It used to be that real estate investors had to rely on their own cash savings, main street banks, and mortgage bankers or brokers for institutional mortgage loans. After the crisis of 2008, the banks left investors hanging and these big lending institutions lost a lot of credibility among savers and all types of investors. They simultaneously created a big void in financing for real estate and sent individuals with capital scrambling for ways to safely and profitably put their money to work where they would be appreciated. Now we have an explosion of private individuals eagerly looking to loan their money on real estate.
We highly recommend taking the time to get training and become a Certified Private Lending Specialist through the REWW Academy.
Who are Private Lenders?
There are some companies which pool private money to broker loans on real estate deals, but private lenders are really individuals with money to invest. They can be anyone who has savings and capital for investment. Some are already actively loaning on real estate, others are waiting for the opportunity.
They may be:
- Doctors, lawyers, and CEOs with great incomes and surplus cash
- Individuals with retirement savings in 401ks or IRAs
- Retirees in need of passive income
- Heirs of estates and trusts
- Tech entrepreneurs with successful startups
- Lottery winners
- Friends, family and neighbors
Why They Do it
There are many reasons that these individuals choose to invest this way, including:
- To grow nest eggs faster
- No acceptable returns elsewhere
- Need for passive income
- Interest in real estate, but lack time and knowledge
- Desire for secure investments
What Private Lenders Want
- Good reporting and communication
- Safety for capital
- Consistent returns
- Above average yields
- Passive income
- Documentation securing the investment
Some private lenders already have experience and specific loan terms they want. Others are highly flexible and may entertain a wide variety of loan options, as long as they meet their goals and satisfy their need for security.
Benefits of Using Private Money
- Fast closings
- Flexibility in loan terms
- No underwriting hassle
- Attractive interest rates
- Unlimited number of deal volume
- Not using personal credit
- Ability to fund deals banks won’t
Finding Private Money
There are a lot more private lenders, and potential private lenders out there than most investors are aware of. In the past, finding and securing them as a financial partner has taken up weeks and months, and dollars of investors’ time. Now it is much easier.
Here are some of the places you’ll find them:
- Real estate investor clubs
- Real estate seminars and events
- Via mortgage brokers
- Internet real estate forums
- Public Records
If you know what to look for you can even find private lenders who aren’t out there offering their money. You can beat the competition to the capital and the most attractive sources of financing. After all many wealthy individuals don’t want to post an open casting call to the world to knock on their door asking for a dollar.
3. Hard Money Lenders
Hard Money lending has been an incredible asset for all types of investors for decades. These are typically shorter term loans of 6 months to 5 years. They carry the most costs and interest of any financing. Yet, after private money these lenders can be among the most flexible and aggressive in putting out capital.
Hard money lenders will typically ask for high interest rates and high numbers of points. They may or may not have prepayment penalties. However, they are mostly focused on providing short term financing for flips. will offer capital for refinancing and wholesaling.
The benefits have traditionally been very fast funding with few requirements. However, these lenders have changed a lot since 2008. It used to be that if you had a pulse and could contract on a property at a good price you could get hard money in 3 days. Now many have underwriting terms that are as tough as conventional mortgage lenders, or worse.
4. Fix & Flip Funding & Rehab Loans
More lenders have been hitting the market to specifically market themselves to house flippers. These may technically fall into some of the other baskets on this list, but specialize in investment property loans for house flips.
Expect rates and costs to be high, but getting the freedom to acquire properties in need of serious repairs. They will fund deals that banks won’t touch. Like burnouts, storm damaged homes and those with roof or foundation problems.
They are typically fast to fund, but normally stick to funding deals in their local area. There are some exceptions to this, where they will operate in multiple states.
Some will fund as much as 90% of the purchase price, plus funds for making the repairs. However, investors should expect to have to provide some type of track record of successful flipping, and to have to put up at least 10% of the total budget from their own cash.
5. Bridge & Blanket Mortgage Loans
Commercial mortgage lenders, banks and conduits for big funds will also often offer bridge loans and blanket mortgage loans. Essentially, these loans leverage your equity in existing investment properties and give you the cash to buy others, or put down a larger down payment on new acquisitions. They are one loan which can cover many properties in the same paperwork.
The benefits can include better terms for putting up more collateral, and having to deal with a lot less paperwork. You’ll only have to manage one loan, which can seriously cut down on the amount of work you have to do to manage financing, as well as the costs, while reducing the risks you’ll miss a payment or critical piece of mail from a lender.
What’s crucial here is knowing any prepayment penalties and exactly what they’ll cost if you pay off early, as well as what it will cost to get individual releases on each property if you want to sell one. Technically the whole loan is liened against each of your assets. You can’t pay off that big of a loan if you say sell just one of 25 properties. So, you’ll need an agreement which allows you to release and sell off one at a time.
6. Mini Perm Loans
These are medium term loans typically used on commercial, mixed use or apartment building properties. They provide funding to acquire, and possibly renovate a property, and then hold it until performance is proven and a better long term loan can be secured.
When you take on a property that needs repairs or has a low occupancy rate, lenders will want to charge a lot more in interest for the higher risk. One of these loans helps you get in, prove you can lease it and generate a good income, and then shift to permanent financing with better interest rates.
7. Debt Crowdfunding
Crowdfunding portals can be a viable way of raising funds for house flips, acquiring rentals and redeveloping properties. There is donation based, equity and debt crowdfunding. The rules will depend on which type you try to raise. You can set whatever terms you like, and can gain many other visibility and engagement benefits in the process. However, it is critical to accurately assess the costs associated with this. You may need a sizable budget for marketing and SEC regulatory filings.
8. Lines of Credit
One of the most flexible types of investment property financing are lines of credit. They allow you to borrow just as much as you need, and pay them back as fast as you need, so that you are only ever paying interest on exactly the amount you are using. Rates are typically very good, and closing costs are very low. The most common types are HELOCS (Home Equity Lines Of Credit), personal lines of credit, and business lines of credit. They may be secured or unsecured. They downsides are that they are typically for lower sums of money, and can often be reined in by lenders during national credit crunches.
9. Working Capital Loans
If you have an established business you may be eligible for a working capital loan. These are typically very easy to get. Rates can be very attractive or in the high double digits depending on the dynamics of your loan. These are like merchant advances in that they are based on your income history. If you process payments online, and have brought in at least $100,000 in the past year, you might qualify for $25,000. Then you only pay it back as you actually bring in new cash.
How will you financing your next real estate deal?