Creative Ways to Finance Investment Property
Most investment properties don’t qualify for the traditional loan programs that are so attractive to home buyers. And besides that, lending standards have become much more difficult now that banks have been forced to deal with lots of foreclosures and declining property values. These two factors make it more and more difficult to get financing for your investment property. However, if you are creative and willing to do some asking around, there are still plenty of creative ways to get the financing you need. Here are our some of the best.
Use a Mortgage Broker to Find Traditional Lenders But Creative Programs
While it’s true that many traditional banks and lenders may turn you away, there are plenty of banks throughout the country that are still looking to lend money to certain types of investors. So despite your local bank not wanting to invest in property because they are already overloaded, there may be a bank or lender on the other side of the country that is looking for exposure to a different real estate market. Sometimes these lenders are national and sometimes they are regional. The hardest part about getting a loan from these lenders is finding them. That’s why it often pays to find a mortgage broker to help you search for a creative loan.
Mortgage brokers have access to dozens, hundreds or even thousands of lenders and can search their database to help you find the best loan available. They are especially useful when you are looking for non-traditional loans. That’s because non-traditional loans are not as competitive and therefore the rates and terms can vary dramatically. By having a broker shop around for the most appropriate type of loan and for the lowest rates, you can often find the most ideal loan for your real estate investment. And if you’re worried about having to pay the broker, don’t be. Mortgage brokers get paid an origination fee by the lender. The same fee that would be getting paid to any other banker or lender that would give you a loan.
A final reason that mortgage brokers are a great and creative way to find a loan is because of all the knowledge they carry. At a bank, the banker knows only about the loans that his or her bank offers. However, a broker has to be savvy on all types of loans. You may have to ask around for a mortgage broker that specializes in investment property, but once you find a good broker, they can help you find the right loan by asking you the right questions, and matching your needs with the loans available. For example, mortgage brokers can find loans that require no income verification, loans that are based on the cash flow potential of the investment, and loans that are specialized for your type of investment.
Unfortunately, not everyone will be able to find a loan from a traditional lender. In that case, it pays to get even more creative. Here are your next best opportunities.
Use Seller Financing To Buy an Investment Property
If you can’t get the loan that you want from a traditional lender, consider asking the seller of the property to help you finance it. While it’s true they are looking to cash out of their investment, they are often open to the idea of a partial payment in cash and then an annuity of loan payments until the property is refinanced. If you’d like to pursue this course of action, you’ll have to become your own salesperson, as most sellers will have to be sold on the idea. To get them to bite you can offer them a higher overall payment for their property than others are offering, or even higher than they were asking. You could also offer them a favorable interest rate that matches what they would earn on the money they loan you if they were to invest it themselves.
Seller financing used to be a much easier sell, because years ago many mortgages could be rolled over into a new owner’s name, however, that is not the case anymore. If you want the seller to help, be creative with your approach. Put together several financing options that include different payment levels, interest rates, and loan lengths so that the seller can choose an option that is favorable to him or her. Once you agree on terms, you’ll have to draft a loan agreement and sign it with a notary. To get a loan agreement you can either find a copy of a generic agreement and modify it, or you can have an attorney or title company help you draft one.
Hopefully, you can get your seller to help you buy the income property, but if not, there are still other ways.
Withdraw Equity From Your Home to Buy a Property
I’ve know people that have used their credit cards to finance entire apartment buildings. They would pull out 10 to 20 percent of the value of their investment and then finance the rest with an adjustable rate, no income verification loan. This may have been the riskiest investment I’ve ever seen but it proves that if there’s a will there’s a way. In other words, if you’re sure that your investment will pay dividends (and the mortgage) down the road, you can consider withdrawing money from your home equity or other assets to help you finance it. For example, if you already own a few properties and need a 25% down payment for a new investment, you could potentially open up a line of credit or home equity loan on one of the properties or your own home. You could also refinance other properties in order to take cash out and use it for the new property investment.
Withdrawing equity from your home is risky and even riskier in times when home prices have been falling. Before you do this, make sure you have enough income to be able to face any setbacks that may happen over the next several years.
Ask Friends or Family to Invest With You
Another source of funding for you real estate could potentially come from your friends and family. The important thing here is that you do not try to coerce or take advantage of your friends and family. If you are going to borrow money from them, then you need to offer them a fair rate of return. If you want them to invest with you, then you may have to offer them an ownership share of the property you are buying. Once you find someone that is interested in your investment idea, there are lots of both small and large details to work out.
For example, you have to figure out how much money they are going to lend you. You’ll also need to come up with an interest rate. Then, you’ll need to figure out a term for the loan. Is it a loan for five years at which time you will refinance it to more traditional financing? Are you offering them an ownership percentage? If so, you’ll need to make sure that they know that you are the sole and primary manager of the property and that they are only a passive investor. You’ll also have to come up with a plan on how to pay them back. Once you have all the details agreed upon, you’ll need to get an attorney or an experienced real estate or title agent to help you draft an agreement or loan contract. These types of loans are risky because mixing money and family often causes troubles that no one could have anticipated.
Consider a Hard Money Loan to Buy Your Property
If you’ve tried all of the other techniques but have had no luck raising any money, then you could consider a hard money loan. Hard money loans are given based almost entirely on the “hard” asset, or in other words, the value of the property. Typical hard money loans are for up to 70% of the value of the property you are buying. Hard money loans are not given by banks, but by private lenders, and they carry interest rates that are significantly higher than traditional loans. More importantly, hard money loans are for short periods of time, usually only up to five years. That means that if you are considering a hard money loan, you will have to have a plan in place to refinance the property in a few years in order to pay off the hard loan.
These are the most expensive loans and are risky for obvious reasons, but the biggest risk is that you can’t refinance the hard loan into a new loan when the time comes, and may have to give up the property. Hard money loans are best in cases where there is a problem with the property that can be fixed within a short period of time. Sometimes a simple problem such as having a kitchen or bath that doesn’t function will prevent any traditional lenders from giving you a loan, because the house is deemed “unliveable”. Another case would be for a new construction property that came for sale and is not fully completed. Whereas traditional lenders may not lend in these cases, a hard money loan could be used to acquire the property, fix the defects, and then refinance the loan and pay back the hard money.
In conclusion, while we’ve discussed several creative ways to finance an investment property, there are many other creative ways that you could use that include things like sale leasebacks and even personal lending. If you search around enough and keep your options open, there is probably a way to finance any realistic investments that you have in mind.