May 1, 2023
How to Fund Your Next Real Estate Investment Deal
Real estate investment is not the same as buying a property for personal use. An investment property enters your portfolio and needs only to ROI at a decent pace to be considered a good investment. Rental homes, fix-and-flips, and vacation rentals all have potential to become profitable over time with the right strategy. While most real estate transactions require some out of-pocket cash to close the property, not all do.
The amount of cash required to invest varies widely based on the type of asset and funding method. If you are considering an upcoming real estate investment, it's important to consider all of your funding options. Today, we're taking a closer look at the top six ways to fund your next real estate investment deal.
Cash Savings
For independent investors, cash savings are often used to strike a strong negotiating position and to quickly close a deal without the need for outside financing to make it happen. You can also cultivate a more qualified offer when working with a seller whose property will be a beneficial addition to your portfolio.
Of course, leverage is generally considered a good thing in real estate and investment buyers typically aim to put up the least amount of out-of-pocket cash possible. When using your cash savings, you can reduce your total debt burden for an investment, but also put more of your current wealth into the deal.
Retirement Accounts (401k / IRA)
When income from your investment real estate is your retirement plan, it can sometimes make sense to use funds from your 401K or IRA retirement accounts to fund a deal. This is usually only a good option when the income promises to provide more than the potential rewards of the invested cash in your accounts. You should also consider the potential penalties of early or lump-sum withdrawal of these funds depending on your age and the conditions of each account.
HELOC
A HELOC stands for a Home Equity Line of Credit. This is a form of cash taken from the equity of a current property. In other words, you borrow against the percentage of a house (usually a mortgaged home that you own) in order to invest in future properties. HELOCs are most often used as home improvement loans, reinvesting in the same house from which you draw the equity to improve it's overall value. However, you can use HELOC funds to invest in new property.
Remember that a HELOC effectively extends the duration of your mortgage by whittling down your total equity in the property, but paying off a HELOC with income from your investment properties will reverse this effect.
Hard Money Lenders
Hard money lenders differ from traditional banks because they underwrite/qualify loans based on your track record rather than your debt-to-income ratio. Hard money lenders are a valuable resource for property investors because they make it possible to take out a loan for new property even when existing investment property is still paying itself off. These lenders can typically close a loan faster, but interest rates are also higher and you will want to closely examine the fees or hoops to jump through in order to release funding draws.
Private Money Lenders
Private money lenders from an investment real estate perspective become partners in a joint venture. These may be friends, family, or business partners who lend a portion of the money you need to invest in a new property. Because they are flexible based on the private lender, private money loans can be structured in many different ways, including joint ventures (splitting profits), interest-only, or even creative returns agreed on by all involved parties.
Seller Financed
Seller-financed investment purchases are unique to real estate - in which the seller actually holds the loan and you pay them back over time. In this way, a seller can allow you to take control of a property and begin making a profit with your investment strategy while agreeing to receive payment over time without working through a third-party lender.