How Much Money Is Needed To Invest in Real Estate?
Updated: Jun 3, 2020
Most people believe they need a large down payment to even start investing. IT'S NOT TRUE! It's a big myth, and without any further information the majority of people stop right there. Does this sound familiar? Is this you?
The truth is there are a ton of ways to finance real estate deals. There are methods that are more sophisticated and take experience, connections and know how. AND there are ways to purchase with NO MONEY OF YOUR OWN.
Home Equity Many beginning investors start with the equity in their primary residence. Yes, a home equity loan or line of credit. Easy to get at just about any bank (if you have equity), and you only make payments on the funds when they are in use. With real estate appreciating at an average of 5% percent annually right now, maybe it's time to check what equity you may have. (My team of Realtors are always happy to do a complimentary market analysis to help you decide if this is an option.) For investment property purchases, it takes a 25% down payment if you are not planning to live in the property. In addition, the equity is figured with a typical formula lending on the difference of 75-80% of the value of your home minus the amount owed.
Seller Financing When I got divorced my credit took a hit and I couldn't qualify for a mortgage. I found a house that would accept Seller Financing and bought it with a contract for deed. I paid the owner monthly--Seller Financing--rather than a mortgage company. Generally, this requires a larger down payment and sometimes a little higher interest rate but it's worth it when credit your is challenged. Another way people use Seller Financing is when the Seller has the house paid off and doesn't want to have a windfall and the tax consequences. The Seller would rather take $1000 a month and spread out the tax implications. Some investors even make money by renting out a property that is seller financed at a higher rate than the monthly payment; they make money on the spread.
Hard Money A hard money loan is a specific type of asset-based loan financing in which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. With the lack of conventional lending products available to real estate investors, most investors turn to hard money financing as a bridge loan between the acquisition of a property and the permanent financing. Those who are doing rehab or fix and flips often use hard money to acquire a property that is in need of repairs. Banks aren't too lending friendly when it comes to distressed properties. Usually this is a business to business transaction--LLC to LLC--that helps acquire or handle the construction expense of a project. These loans are typically higher interest rates and short term. The cash available to make an acquisition can help win in multiple offers situations. In most areas, the more prominent hard money lenders charge around 5 points and 15% interest.
Private Money This can be the easiest to handle, one of the lowest costs for your business and as available as you need it to be. Private money can come from relatives, friends or high wealth individuals who are familiar with real estate investing. It never hurts to ask those who are in your network because there are sophisticated techniques that can be employed here. Many times, you may find private lenders willing to charge less. For example: Borrow from your uncle's IRA and they earn interest income or profit share and you have the ability to acquire property with cash or funds to fix up and add value to a property.
Now that I have cleared up some of the options for investing in real estate, give me a call when you are ready to get going.